By: Luis M. Canales

Understanding a financial statement might seem overwhelming if you're not an accountant, but in reality, it’s a key tool that every business owner, entrepreneur, or manager should be able to read—even at a basic level. In this article, I’ll explain in simple terms how to interpret the most common financial statements used in Nicaragua and what each one is for.

Before we begin, it’s important to know that a financial statement is a document that reflects the economic health of a business over a specific period. There are three main types:

1. Balance Sheet
2. Income Statement (also known as Profit and Loss Statement)
3. Cash Flow Statement

To better understand each of these documents, let’s take a brief look at what each one includes.

1. Balance Sheet

The Balance Sheet shows the financial position of the business on a specific date, commonly on a monthly basis (from the 1st to the last day of the month). It is divided into three parts:

• Assets: Everything the business owns—cash, inventory, accounts receivable, property, etc.
• Liabilities: Everything the business owes—loans, accounts payable, pending taxes, etc.
• Equity: What remains for the owners once liabilities are subtracted from assets.

Key Formula:
Assets = Liabilities + Equity

It’s important to note that if assets are greater than liabilities, that’s a good sign. But if equity is negative, it could be a warning signal.

2. Income Statement

This statement shows whether the business is generating profits or losses during a specific period, typically the same as the Balance Sheet (monthly). It is structured as follows:

• Revenue: Sales made during the period
• Operating Costs and Expenses
• Net Profit or Loss

Use this statement to compare income with expenses. A positive net profit is good, but if it’s low, you should review your costs and check for any extraordinary expenses that might be impacting the results.

3. Cash Flow Statement

This statement shows how cash flows in and out of the business and is divided into three main activities:

• Operating Activities: Inflows and outflows from the core business operations
• Investing Activities: Purchases or sales of long-term assets (vehicles, machinery, etc.)
• Financing Activities: Loans received or debt payments made.

If you’re not a finance expert or accountant, we recommend viewing your financial statements as a story of your business—analyzing what sold the most, where you spent less, whether you have cash on hand, or if you're in debt. It’s also very helpful to compare current results with previous periods to detect trends.

But above all, don’t hesitate to ask your accountant to explain anything you don’t understand.

You don’t need to be a finance or accounting expert to understand your numbers—but you do need to understand your financial statements well enough to make sound decisions for the control and growth of your business.

And remember, if you need help interpreting your reports or organizing your accounting, Cala Accounting offers you clear, professional, and personalized advice so we can grow your business—together and without complications.