Understanding Your Startup’s Financial Health: A Simple Guide to the P&L and Balance Sheet

Running a business without understanding your financial statements is like flying blind. Whether you’re pitching to investors, making hiring decisions, or just trying to stay cash-positive—your Profit & Loss Statement (P&L) and Balance Sheet are your two most important tools.

Let’s break them down, in plain English.

Part 1: Profit & Loss Statement (P&L)

What is a P&L?

Also called an Income Statement, this report shows your business’s revenues, costs, and expenses over a specific period (usually monthly, quarterly, or yearly).

It tells you one simple thing: Did you make money, or lose money, during this period?

What’s Included in a P&L?

Here’s a basic structure:

Category	Example Amount
Revenue (Sales)	$100,000
- Cost of Goods Sold	$40,000
= Gross Profit	$60,000
- Operating Expenses
- Salaries	$20,000
- Rent	$5,000
- Software	$1,000
= Operating Profit	$34,000
- Taxes	$4,000
= Net Profit	$30,000

How Founders Should Read a P&L

●     Check your gross margin:

 Gross Profit ÷ Revenue. This shows your product profitability.

●     Track burn rate:

 If you’re not profitable, how much are you losing per month?

●     Compare trends: 

Are expenses rising faster than revenue?

●     Watch out for one-off costs:

  A sudden marketing push or legal fee could skew monthly profitability.

Founder Tip:

“Our early P&L looked great—until I realized our AWS credits ran out and cloud expenses tripled the next month.” 

— A SaaS founder, Series A

Part 2: Balance Sheet

What is a Balance Sheet?

Unlike the P&L (which shows a time period), the Balance Sheet is a snapshot of your financial position at a specific point in time.

It shows what you own (assets), what you owe (liabilities), and what’s left over for you (equity).

The basic formula:

Assets = Liabilities + Equity

What’s Included in a Balance Sheet?

Category	Example Amount
Assets
Cash	$50,000
Accounts Receivable	$20,000
Inventory	$15,000
Equipment	$10,000
Total Assets	$95,000
Liabilities
Credit Card Debt	$5,000
Accounts Payable	$10,000
Loans	$20,000
Total Liabilities	$35,000
Equity
Owner's Equity / Retained Earnings	$60,000
Total Liabilities + Equity	$95,000

How Founders Should Read a Balance Sheet

●     Is your cash runway healthy? High liabilities and low cash = red flag.

●     Are customers paying on time? Accounts Receivable growing without cash might mean payment delay

●     Do you have too much inventory or unused assets? That’s cash sitting idle.

●     Equity should grow over time If it’s shrinking, your business is losing value.

Common Mistakes

●     Mixing personal and business expenses in accounting

●     Not updating depreciation on assets like laptops or machinery

●     Ignoring deferred revenue (for SaaS/prepaid models)

●     Forgetting loan interest accruals

Tools to Use

●     QuickBooks / Xero: Auto-generates both reports

●     Live dashboards: Services like Fathom or Baremetrics help visualize trends

Your accountant or CFO: They should walk you through both monthly

Final Thoughts

Both the P&L and Balance Sheet are essential—not just for tax season or investors, but for making confident, strategic decisions.

“Once I understood how to read our financials, I stopped relying on gut feeling and started acting on real data.” — Founder of a 6-figure eCommerce brand