Reading Financial Statements

6 min read

By Kevin — CPA, MBA, CEO of IOL Inc.

Financial statements are the language of business. If you can't read them, you're flying blind. Kevin has seen founders walk into investor meetings unable to explain their own P&L — that meeting ends quickly.

There are three core financial statements, and they're all connected. Understanding how they link together is what separates founders who manage by gut from those who manage by data.

1. Profit & Loss Statement (Income Statement)

The P&L answers one question: is the business profitable? It covers a period of time (monthly, quarterly, annually).

The flow is:

• Revenue — what customers pay you
• - COGS (Cost of Goods Sold) — direct costs to deliver your product
• = Gross Profit — your margin after direct costs
• - Operating Expenses — salaries, rent, marketing, etc.
• = EBITDA — operating profit before depreciation and tax
• - Depreciation & Tax
• = Net Income — the bottom line

Gross margin is the first health check. SaaS companies should target 60-80%. Below 40% means the business model needs rethinking — you're spending too much to deliver the product.

EBITDA is what investors focus on for operating profitability. It's okay to be EBITDA-negative in Year 1 if you're investing in growth, but you should show a path to positive EBITDA by Year 2-3.

2. Balance Sheet

The Balance Sheet answers: what does the company own and owe? It's a snapshot at a specific point in time.

The fundamental equation: Assets = Liabilities + Equity. This must always balance — hence the name.

• Assets — cash, accounts receivable, equipment, inventory
• Liabilities — accounts payable, loans, deferred revenue
• Equity — owner's investment + retained earnings (accumulated profits)

For startups, the most important Balance Sheet items are cash (your lifeline), accounts receivable (money customers owe you), and accounts payable (money you owe suppliers). The gap between AR and AP is your working capital.

3. Cash Flow Statement

The Cash Flow Statement answers: where did cash actually come from and go? It reconciles the P&L (accrual accounting) with actual cash movements.

Three sections:

• Operating Activities — cash from running the business (net income + adjustments for non-cash items + working capital changes)
• Investing Activities — cash spent on long-term assets (equipment, software, CapEx)
• Financing Activities — cash from investors or loans, dividends paid

Why Cash Flow is Not Profit

This is the concept that trips up most founders. You can be profitable on paper and still run out of cash. How?

• You invoiced ₱500K in revenue (P&L shows profit) but the customer hasn't paid yet (cash didn't come in)
• You bought ₱1M in equipment (cash went out) but only ₱200K shows on the P&L as depreciation
• You collected customer deposits (cash came in) but can't recognize revenue yet

Kevin's rule: cash flow is the #1 killer of startups. Not bad ideas, not competition — running out of cash. Watch your cash balance obsessively, not just your P&L.

How the Three Statements Connect

An integrated financial model links all three, so when you change one assumption (like revenue growth), it cascades through all statements automatically.