Understanding financial statements is a vital skill for both business owners and individual investors. These documents provide a window into the financial health, performance, and potential risks of a company — and consultants must be able to explain them in clear, simple terms.

There are three core statements to master:

1. Income Statement (Profit & Loss)
   This shows revenue, expenses, and profit over a specific period. Key metrics include gross profit, operating income, and net income. A healthy income statement indicates strong operational performance, while recurring losses may raise red flags.
2. Balance Sheet
   This provides a snapshot of assets, liabilities, and equity at a specific point in time. It reveals how a business is funded and how solvent it is. High debt levels relative to equity may signal financial risk, while strong asset growth often reflects expansion.
3. Cash Flow Statement
   Many profitable businesses fail due to poor cash flow. This statement tracks operating, investing, and financing activities, showing where money comes from and where it’s spent. Consistent positive cash flow from operations is usually a good sign.

Consultants must also interpret ratios such as current ratio, return on equity, or debt-to-equity. These offer quick insights into liquidity, profitability, and leverage.

Most importantly, financial statements should never be read in isolation. Comparing trends across periods or benchmarking against industry peers provides deeper insight.

By teaching clients how to read these statements, consultants help them become more financially informed and better equipped to make data-driven decisions.