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Introduction
In the previous article, we discussed accounting as a system for recording, classifying, and summarizing all financial activities within a business. However, once the data has been recorded, a more important question emerges: what does all of that information ultimately become? The answer lies in the three core financial statements of a business.
Most business owners have heard terms such as the Income Statement, Balance Sheet, or Cash Flow Statement. Yet not many truly understand why a company needs three separate reports to reflect the same business operations. The reason is simple: no single report can fully capture the entire financial reality of a business. Each report only reflects one perspective. And as a company grows, the owner’s financial perspective must evolve as well.
To better understand this, let’s return to the story of Business, an online cosmetics seller. Business, 26, graduated from the Foreign Trade University and previously had a stable office job. After several years of working, he decided to leave his corporate career and start selling Korean cosmetics on Shopee. In the early days, the business was still very small. Business handled everything himself: sourcing products, packing orders, running ads, and managing customer service. In the first month, the shop sold around 200 orders. Revenue grew faster than he expected, which made him extremely excited.
However, at the end of the month, when Business checked his bank account balance, he started feeling confused. Orders kept increasing, revenue looked strong, but the amount of cash in the account had barely grown. And that is often the moment when many business owners truly begin their journey into corporate finance.
At first, most people only focus on one simple question: “Did the business make a profit this month or not?” But once a business starts operating in reality, bigger questions begin to appear. Where is the cash actually sitting? Why is revenue increasing while cash flow still feels tight? Is inventory supporting growth, or is it trapping working capital? Is the business truly generating cash, or only generating accounting profits on paper?
And this is exactly where the three financial statements begin to reveal their true value. One report helps the business understand operational performance. Another reflects the company’s assets, liabilities, and owner’s equity at a specific point in time. The last one shows how cash is actually flowing in and out of business.
Understanding the connection between these three reports is also the point where many founders shift from simply “running a business” to truly “managing a company.”
1. Income Statement (Profit & Loss Statement – P&L): Is the Business Actually Profitable?
When starting a business, almost every entrepreneur focuses on one primary question: “Did I make a profit or a loss this month?”
This was exactly the stage Business faced when he began selling Korean cosmetics on Shopee. In the first month, the shop generated around 200 orders. The platform dashboard showed total revenue of VND 50 million, and Business immediately felt optimistic about business performance. However, this is also the point where many business owners begin confusing “revenue” with “actual profit.”
Revenue only reflects the total sales value before deducting all the operating costs behind the business. To understand whether the company is truly profitable, Business needed to look deeper into the shop’s full cost structure.
| Item | Amount |
| Revenue (200 orders × VND 250,000) | 50,000,000 |
| (-) Cost of Goods Sold | -30,000,000 |
| /=Gross Profit | 20,000,000 |
| (-) Shopee platform fees | -3,000,000 |
| (-) Shipping costs | -2,000,000 |
| (-) Advertising expenses | -8,000,000 |
| (-) Packaging, staffing, warehouse costs | -4,000,000 |
| (-) Other operating expenses | -1,500,000 |
| /=Net Profit | 1,500,000 |
After consolidating all expenses, Business realized the shop was left with only around VND 1.5 million in net profit, equivalent to a profit margin of roughly 3% of revenue. In other words, although the business appeared to be growing in sales, it was barely generating meaningful financial value for the owner.
This is also the most important role of the Profit & Loss Statement (P&L). The report helps a business clearly see, over a specific period of time, how much revenue it generated, how much it spent, and how much actual profit remained in the end.
At its core, the logic of a P&L always revolves around a very simple formula:
Revenue – Cost of Goods Sold = Gross Profit
Gross Profit – Operating Expenses = Net Profit
Without a P&L, many business owners fall into the trap of being “extremely busy but not truly profitable.” Revenue may continue increasing, orders may keep coming in, and operations may look active every day, but the actual financial efficiency of the business can be far lower than it initially appears.
You can think of the Profit & Loss Statement (P&L) as a student’s final report card. It shows whether the business performed well or poorly during a certain period, how much revenue it generated, and how much profit remained after deducting all expenses. However, just like an academic report card, a P&L does not show how much actual cash the business currently has on hand.
In e-commerce, this is one of the most common misunderstandings among online sellers. Many businesses look at the revenue displayed on Shopee, TikTok Shop, or Lazada dashboards and automatically assume that it represents “money earned.” In reality, revenue is only the starting point. After deducting platform commissions, shipping fees, advertising costs, payment processing fees, product returns, and other operating expenses, the actual net profit may only be around 3% to 10% of total revenue.
That is exactly why businesses need a Profit & Loss Statement. A P&L helps business owners understand the true quality of profit behind revenue growth, rather than relying only on surface-level sales numbers.
This becomes even more important for multi-channel businesses. Each e-commerce platform has a completely different cost structure, commission model, and operational efficiency. One channel may generate very high revenue but extremely low profit margins because of heavy advertising costs or high return rates. Meanwhile, another channel with lower revenue may actually generate significantly stronger profitability.
Therefore, a channel-by-channel P&L does not only help a business understand “how much it sold,” but also reveals which channels are truly creating financial value and deserve further investment and expansion.
2. Balance Sheet (BS): What Does the Business Own and What Obligations Does It Carry?
As a business begins to grow, the financial questions business owners ask also start to change. In the early stage, Business was mainly concerned with one question: “Did the business make a profit or a loss this month?” But after about six months of operations, bigger concerns started to emerge: how many assets does the business actually own, how much debt does it carry, and where are the real financial risks?
At this point, Business’s cosmetics business had grown nearly five times larger than it was in the beginning. The company started accumulating larger amounts of inventory, building payables with suppliers, taking bank loans to purchase inventory, and investing in operational assets.
Specifically, at that time, Business’s business owned:
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Inventory worth approximately VND 300 million
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Around VND 80 million in receivables from Shopee and TikTok Shop payouts not yet received
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A small delivery truck worth VND 180 million
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Operational equipment and computers worth approximately VND 20 million
However, alongside the growth in assets, the business also began carrying more financial obligations:
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A bank loan of approximately VND 200 million used for inventory purchases
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Around VND 150 million owed to Korean suppliers
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Approximately VND 10 million in unpaid taxes
At this stage, if Business only looked at the Profit & Loss Statement (P&L), the business still appeared to be performing quite well, generating around VND 25 million in monthly profit. However, a sense of financial pressure began to emerge. Business realized that the company was holding a large amount of inventory while becoming increasingly dependent on loans and supplier credit. If the next sales season failed to meet expectations, cash flow pressure could appear almost immediately.
The P&L helps a business understand how much profit it generated during a certain period, but it does not show what the company actually owns, how many financial obligations it carries, or how financially stable the business truly is. A company can report profits on the P&L while simultaneously facing heavy debt pressure, slow-moving inventory, or operational cash shortages.
That is exactly why the Balance Sheet (BS) becomes the next critical financial report once a business enters a growth stage. If the P&L reflects the company’s “operating performance” over a period of time, then the Balance Sheet reflects a “financial snapshot” of the business at a specific moment. It shows how many assets the company owns, where those assets came from, and how dependent the business is on debt versus owner’s capital.
At its core, the Balance Sheet is always made up of two sides that must remain balanced: the company’s assets on one side, and the sources used to finance those assets on the other side: namely liabilities and owner’s equity.
| ASSETS: What does the business own? | LIABILITIES & OWNER’S EQUITY: Where did the assets come from? |
| Current Assets | Liabilities |
| Cash and bank deposits: VND 50 million | Korean supplier payables: VND 150 million |
| Pending e-commerce platform payouts: VND 80 million | Bank loan: VND 200 million |
| Inventory: VND 300 million | Unpaid taxes: VND 10 million |
| Long-term Assets | Owner’s Equity |
| Delivery truck: VND 180 million | Minh’s contributed capital: VND 200 million |
| Equipment and computers: VND 20 million | Retained earnings: VND 70 million |
| Total Assets: VND 630 million | Total Liabilities & Owner’s Equity: VND 630 million |
The Balance Sheet operates based on a very important principle: every asset a business owns must be financed by a specific source of funding. If a company has inventory, cash, trucks, or equipment, those assets must have been funded either through owner capital or through liabilities such as loans and payables.
This is also the foundation of double-entry accounting. No asset appears “out of nowhere” on the financial statements. Every increase in assets must always be matched by either an increase in liabilities or an increase in owner’s equity.
And this is the point where a founder begins shifting from the mindset of “Is the business profitable?” to a much more important question: “Is the business financially healthy beneath the growth?”
You can think of the Balance Sheet (BS) as a financial X-ray of the business at a specific point in time. If the Profit & Loss Statement (P&L) reflects operational results over a period, the Balance Sheet reveals the company’s overall financial condition at the present moment: whether the business is financially strong or carrying hidden risks. The report not only shows how much money the company makes, but more importantly, it reveals what the business owns, how much it owes, and how much value truly belongs to the owner after deducting all obligations.
That is the core question the Balance Sheet answers: at a specific moment: such as month-end, quarter-end, or year-end, what assets does the company hold, what financial obligations does it carry, and after subtracting all debts, how much real value remains for the business owner?
In e-commerce, this distinction becomes especially important because there is often a major difference between “numbers on paper” and actual economic value. For example, Business’s Balance Sheet recorded inventory worth VND 300 million. However, if VND 100 million of that inventory consists of outdated, expired, or slow-moving products, the company’s real asset value is no longer the original VND 630 million shown on the report. As a result, the true owner’s equity would also decline accordingly. This is precisely what the Balance Sheet helps founders see: the actual quality of assets behind the accounting numbers.
This also explains why investors and banks rarely evaluate a business based on revenue alone. Many shop owners tend to value their business by sales volume, saying things like “my store generates VND 1 billion per month in revenue.” But from a financial perspective, revenue is only a small part of the picture. What investors and lenders truly care about is the quality of the company’s assets, the structure of its debt, and the amount of owner’s equity remaining after all financial obligations are deducted. That is what ultimately reflects the real value of a business.
3. Cash Flow Statement (CF): Where Did the Money Actually Go?
At the end of the year, Business reviewed his financial statements and saw what appeared to be a very positive result. Net profit had reached approximately VND 150 million. However, when he checked his bank account, the actual cash balance was only around VND 8 million. This immediately raised an important question: if the business was truly profitable, why was there almost no cash left?
This is also the stage when many business owners begin to realize a fundamental principle in finance: profit and cash flow are not the same thing. A company can report profits on its Profit & Loss Statement (P&L) while still struggling with day to day cash shortages. The reason is that profit reflects accounting performance, while cash flow reflects the actual movement of money into and out of the business.
And that is precisely the role of the Cash Flow Statement (CF). If the P&L answers the question “Is the business making a profit or a loss?”, and the Balance Sheet shows “What does the business own and owe?”, then the Cash Flow Statement answers the most practical operational question of all: “Where did the cash actually go?”
When Business analyzed the cash flow statement, he finally understood what was happening behind the seemingly strong profit figure. Although the company recorded VND 150 million in net profit, most of that money had not yet returned to the bank account. A significant portion of cash was tied up in an additional VND 180 million of inventory and another VND 50 million of receivables from e commerce platforms awaiting payout. In other words, the business had generated accounting profit, but almost no real operating cash flow during the period.
Meanwhile, the company’s available cash throughout the year mainly came from additional bank loans and extra capital contributed by Business himself. At the same time, the business also spent a considerable amount of cash purchasing delivery vehicles and operational equipment. As a result, even though accounting profit looked healthy, the ending cash balance barely increased.
This highlights the key difference between profit and cash flow. If the P&L functions like a “report card” showing how efficiently the business performed, and the Balance Sheet acts like a “financial snapshot” at a specific point in time, then the Cash Flow Statement works like a tracking system for the movement of cash throughout the entire business operation. It shows where cash truly comes from, where it is being used, and whether the company is generating enough cash internally to sustain itself.
Unlike profit, which can be affected by accounting timing and revenue recognition, cash flow reflects actual cash transactions that have already occurred. For that reason, the Cash Flow Statement is often considered the most transparent indicator of a company’s real financial health and operational quality.
Ultimately, this is the core question the cash flow statement helps answer: during a given period, is the business genuinely generating cash from its operations, or is it surviving mainly through debt and additional capital injections from the owner?
4. What Does the Cash Flow Statement Help Business Owners See?
| Cash Flow Category | Meaning | Key Question |
| Operating Cash Flow | Reflects cash generated from daily business operations such as sales, supplier payments, salaries, and operating expenses | Is the business generating enough cash to sustain its core operations? |
| Investing Cash Flow | Reflects cash used to purchase or sell long term assets such as vehicles, warehouses, machinery, or equipment | Is the business expanding or reducing its operational capacity? |
| Financing Cash Flow | Reflects cash related to borrowing, raising additional capital, repaying debt principal, or distributing profits to owners | Where is the business obtaining cash to continue operating and growing? |
By analyzing these three categories of cash flow, business owners can understand the real financial condition of the business instead of relying only on accounting profit shown on the P&L. A financially healthy business usually generates positive cash flow from its core operations. In contrast, if a company consistently records negative operating cash flow but still appears to be functioning normally, the business may actually be relying heavily on debt or continuous capital injections from the owner to survive.
This situation is especially common in e commerce businesses, particularly among fast growing sellers on Shopee, TikTok Shop, or Amazon FBA. As sales increase rapidly, businesses often need to purchase more inventory, expand advertising spending, and increase operating expenses before cash is actually collected. As a result, revenue figures may look very strong while the actual cash balance continues to decline because a large portion of cash is tied up in inventory and receivables from e commerce platforms awaiting payout.
5. Looking Back: Three Financial Statements Reflect Three Completely Different Perspectives
| Financial Statement | P&L (Profit & Loss Statement) | BS (Balance Sheet) | CF (Cash Flow Statement) |
| Main Question | Is the business making a profit or a loss? | What does the business own and owe? | Where is the cash actually coming from and going? |
| Reflects | A period of time | A specific point in time | A period of time |
| Analogy | A school report card | A financial X ray snapshot | A 24/7 cash movement monitoring system |
| Most Important When | In the early stage of starting a business | When the business begins accumulating inventory, assets, and debt | When the business grows larger and requires cash flow management |
| Limitation | Can be affected by accounting recognition methods | Only reflects a “snapshot” at one specific moment | Does not directly reflect future growth potential |
| Reliability | Medium, depends on how revenue and expenses are recorded | High, if assets and liabilities reflect their real economic value | Very high, because actual cash movement is difficult to distort |
The most important thing to understand is that these three financial statements do not replace one another. They reflect three completely different perspectives of the same business. The P&L shows whether the company is generating profit from its operations. The Balance Sheet reflects what the business owns and what financial obligations it carries. Meanwhile, the Cash Flow Statement reveals how cash is actually moving behind all business activities.
And as a company grows, the financial perspective of the business owner must evolve as well.
In the early stages, many founders only focus on the P&L. When the business is still small, the biggest question is usually simple: “Is the business profitable?” However, once the company starts accumulating inventory, fixed assets, supplier debt, and bank loans, profit alone is no longer enough to evaluate the business properly. At that stage, the Balance Sheet becomes increasingly important because the owner needs to understand whether the company is financially strong or financially vulnerable beneath the surface.
As the business grows further, operates across multiple sales channels, expands product lines, and manages larger amounts of working capital, the Cash Flow Statement often becomes the most critical report of all. This is when business owners begin to see the real operational reality behind growth: is the company truly generating enough cash to sustain and expand itself, or is it relying on debt, additional capital injections, and extended payables just to maintain operations?
That is also why many finance professionals often say: profit is an accounting opinion, but cash flow is the ultimate truth of a business.
6. The Growth Journey of a Business Through the Three Financial Statements
In the early stages of building a business, most founders focus on one simple question: “Did the business make a profit this month?” When operations are still small, processes are relatively simple, and cash movement is limited, the Profit & Loss Statement (P&L) is usually enough to evaluate basic business performance.
However, as the business grows, operations gradually become more complex. Inventory increases, fixed assets appear, supplier payables accumulate, and bank loans begin to enter the picture. At this stage, profit alone is no longer enough. Business owners need the Balance Sheet (BS) to understand what the company actually owns, how much it owes, and how financially stable the business truly is.
As the company enters a larger growth phase with multiple sales channels, broader product lines, and increasingly complex cash movement, the Cash Flow Statement (CF) often becomes the most important report of all. This is the stage where founders begin to see the true nature of business operations: whether the company is generating enough cash to sustain and grow itself, or whether it is surviving through debt, delayed payments, and continuous capital injections from the owner.
Unlike accounting profit, cash flow is very difficult to manipulate because every dollar coming in or going out leaves a real financial trace.
| # | Key Metric to Track | Source | What It Tells You |
| 1 | Net Profit Margin (%) | P&L: Net Profit ÷ Revenue | How much real profit the business keeps from every 100 VND of revenue |
| 2 | Inventory Value | Balance Sheet | How much cash is currently tied up in inventory |
| 3 | Debt-to-Equity Ratio | Balance Sheet: Total Debt ÷ Owner’s Equity | The level of financial leverage the business is using |
| 4 | Operating Cash Flow | Cash Flow Statement | Whether day-to-day operations are actually generating cash |
| 5 | Ending Cash Balance | Cash Flow Statement | How much cash “oxygen” the business still has to continue operating |
For many online sellers, this is the key difference between “selling products” and “running a financially healthy business.” If you only look at revenue dashboards on platforms like Shopee, TikTok Shop, or Amazon, it is like driving a car while only looking at the speedometer. Revenue may be growing quickly, but that alone does not tell you how much cash the business still has, how much debt it is carrying, or how much money is currently trapped in inventory.
These five metrics work like a complete vehicle dashboard. Beyond speed, they also show fuel level, engine condition, and warning signals hidden inside the operating system of the business.
7. Summary: Three Key Takeaways About Financial Statements
The first thing to understand is that every stage of business growth requires a different financial lens. When a business is still small, the Profit & Loss Statement (P&L) is usually enough to answer the basic question: “Is the business profitable?” However, as the business starts accumulating inventory, assets, payables, and bank loans, the Balance Sheet becomes necessary to understand the true financial health of the company. And when operations scale further with higher transaction volumes and more complex cash movement, the Cash Flow Statement (CF) becomes the most important tool for tracking the business’s ability to survive and grow.
The second key point is that the three financial statements do not replace one another. Each report provides a completely different perspective on the same business. Looking only at the P&L is like hearing only one side of a conversation. To truly understand how a business is operating, founders need to connect all three perspectives: whether the business is profitable, what it owns and owes, and how cash is actually moving through the system.
Finally, in finance, cash flow is often considered the “ultimate truth.” The P&L can be influenced by accounting policies and timing of revenue recognition. The Balance Sheet may include assets that still appear on paper but have already lost significant real value. Cash, however, is much harder to disguise. That is why when there are doubts about profit quality or financial health, the Cash Flow Statement is usually the first place to look.
Now that you understand the three core financial statements of a business, a more interesting question naturally arises: why do auditors and professional financial analysts often start with the Balance Sheet instead of the P&L?
The next article will introduce the Balance Sheet Approach: the mindset auditors use to assess the financial quality of a business. More importantly, it is also a method that any business owner can apply as a monthly mini audit to check the financial health of their own company.
