As a business owner, it’s important to stay on top of your finances, even if you have an accountant or bookkeeper overseeing your accounts. One way to get a quick overview of how well your company is doing is to review three key financial statements — the balance sheet, income statement, and cash flow statement.
These reports stand alone and also work together to give you a complete picture of your company’s financial position. Read on for an in-depth look at financial statements, from what they include to what they can tell you, plus some examples of business financial statements.
Key Points
• The three main types of financial statements are the balance sheet, income statement, and cash flow statement, each offering different insights into a company’s financial health.
• The balance sheet provides a snapshot of a company’s assets, liabilities, and equity at a specific point in time, helping to assess its net worth.
• The income statement details revenues and expenses over a period, indicating the company’s profitability and aiding in financial planning.
• The cash flow statement tracks the flow of cash in and out of the business, highlighting the company’s liquidity and ability to cover its expenses.
• Financial statements are essential for internal management and external stakeholders (like investors and lenders) to evaluate a company’s financial performance and make informed decisions.
What Are Financial Statements?
Business financial statements are documents that summarize the business activities and financial performance of a company.
There are many different types of financial statements, and each focuses on a different area of a company’s performance. For example:
• The balance sheet provides an overview of assets, liabilities, and owner’s equity as a snapshot in time.
• The income statement looks at revenues and expenses and gives you the company’s “bottom line” during a particular period.
• The cash flow statement acts as a bridge between the income statement and balance sheet by showing how money moved in and out of the business.
How Do Financial Statements Work?
Business financial statements are typically prepared by an accountant. However, with the help of small business accounting software, you may be able to prepare your own financial statements.
Once prepared, financial statements can be used both internally and externally. For example, you’ll need to provide financial statements if you apply for a small business loan. Investors also use financial statements to analyze the performance of a company, compare that performance to competitors or industry standards, and to make predictions about the future direction of the company.
3 Key Financial Statements
Here’s a look at the three financial statements most commonly used by small businesses.
1. Balance Sheet
A business balance sheet lists your company’s assets and liabilities and shows your company’s net worth on a certain date. Because it’s called a “balance” sheet, assets must balance (a.k.a, equal) liabilities plus equity.
What It Includes
A balance sheet includes these three categories:
• Assets: This lists what your business owns of value that can be converted into cash. It includes current assets (those that can easily be converted to cash within a year or less) and long-term assets (those that won’t be converted to cash within a year).
• Liabilities: This is money that you owe to others, including your recurring expenses, loan repayments, and other forms of debt. Liabilities are broken down into current and long-term liabilities.
• Shareholders’ equity: Also called owner’s equity (for sole proprietorships), this includes the amount of money generated by a business, the amount of money put into the business by its owners/shareholders, and any donated capital.
The balance sheet formula is:
Stakeholders’ Equity = Total Assets – Total Liabilities
What It Tells You
The balance sheet tells you your business’s worth at a given time, so you can better understand its financial position. It can be a good idea to update your balance sheet each month to keep close tabs on your business.
Example
Here’s an example of a fictional company’s balance sheet.
| Balance Sheet | |
|---|---|
| Assets | |
| Current assets | |
| Cash and cash equivalents | $1,500 |
| Short-term investments | $5,000 |
| Accounts receivable | $50,000 |
| Inventory | $4,500 |
| Total current assets | $61,000 |
| Long-term assets | |
| Equipment | $200,000 |
| Less depreciation | -$35,000 |
| Total long-term assets | $165,000 |
| Other assets | $5,000 |
| Total assets | $231,000 |
| Liabilities | |
|---|---|
|
|
| Accounts payable | $13,000 |
| Short-term loans payable | $7,000 |
| Income taxes payable | $5,000 |
| Accrued compensation & benefits | $60,000 |
| Total current liabilities | $85,000 |
| Long-term liabilities | |
| Notes payable | $100,000 |
| Deferred income tax | -$15,000 |
| Total long-term liabilities | $115,000 |
| Total liabilities | $200,000 |
| Stockholders’ Equity | |
|---|---|
| Common stock | $31,000 |
| Total stockholders’ equity | $31,000 |
| Total Liabilities & Shareholders’ Equity | $231,000 |
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2. Income Statement
A business income statement, also called a profit and loss (or P&L) statement, provides an overview of a company’s revenues, expenses, net income, and earnings per share for a certain period of time (such as a month, quarter, or year).
What It Includes
The income statement lists your total revenues, expenses (such as wages, rent, interest paid on debt, and utilities), gains (such as income from the sale of an asset), and losses (such as such as settlement of a lawsuit) to arrive at net income (revenues plus gains minus expenses plus losses).
What It Tells You
The income statement assesses a business’s profitability over a specified period. It can also tell you whether sales or revenue is increasing when compared over multiple periods.
Example
Here’s an example of a fictional company’s income statement.
| Income Statement | |
|---|---|
| Revenue | |
| Sales Revenue | $150,000 |
| Total Revenue | $150,000 |
| Expenses | |
| Cost of Goods Sold (COGS) | $50,000 |
| Salaries and Wages | $30,000 |
| Rent | $10,000 |
| Utilities | $2,000 |
| Marketing | $3,000 |
| Miscellaneous Expenses | $2,000 |
| Total Expenses | $97,000 |
| Net Income | $53,000 |
3. Cash Flow Statement
A cash flow statement shows you how much cash is entering and leaving your business in a given period.
This statement is critical for a small business because it can show you that, while you might be very profitable on your income statement, you could have trouble paying your bills some months, based on when your customers pay you and when your bills are due.
What It Includes
The cash flow statement is divided into three segments:
• Operations: This includes money earned from the products or services the company provides, as well as the money it spends to produce these products or services.
• Investments: This includes the returns the company gets on money it has invested and the cash it spends to acquire and manage these investments.
• Financing: This refers to the money the company has coming in from the debt it uses to finance its operations, as well as the cash it spends on this debt.
What It Tells You
The cash flow statement tells you exactly what you took in, and when you took it in, and what you paid, and when you paid it. It also shows what you’re going to have to pay on certain dates, or in certain months, and what you expect to take in during specific time periods.
This helps you determine if you may need to arrange for extra credit, apply for a loan, or otherwise bring in more revenues, possibly by asking your customers to pay their outstanding invoices.
Example
Here’s an example of a fictional company’s cash flow statement.
| Cash Flow Statement | |
|---|---|
| Cash flow from operations | |
| Net Income | $60,000 |
| Additions to cash | |
| Depreciations | $20,000 |
| Increase in accounts payable | $10,000 |
| Subtractions from cash | |
| Increase in accounts receivable | -$20,000 |
| Increase in inventory | -$30,000 |
| Net cash from operations | $40,000 |
| Cash flow from investing | |
| Purchase of equipment | -$5,000 |
| Cash flow from financing | |
| Notes payable | $7,500 |
| Cash Flow for Period | $42,500 |
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Pros and Cons of Financial Statements
So should you bother with financial statements? Let’s look at the benefits and drawbacks of using them in your business.
Pros of Financial Statements
The biggest benefit of financial statements is that they help you keep your finger on the pulse of your company’s finances. They provide insight into:
• How much and how your business generates revenues
• What the cost of doing business is
• How efficiently your business manages its cash
• What your business’s assets and liabilities are
• Whether your business has the capability to pay back its debts
These statements can help you make smart financial decisions like when to bring on investors or explore small business loan options.
And if you do decide to apply for a loan, the lender may want to see these financial statements to determine the risk level you present as a borrower.
Recommended: Accounts Payable vs. Receivable
Cons of Financial Statements
Financial statements also have some drawbacks and limitations. Here are some to keep in mind.
• They’re based on past data. Because financial statements are based on historical data, they don’t provide information on the company’s current situation.
• Information may be biased. Financial statements aren’t completely scientific. Because some areas are open to interpretation, a business may be able to make their financial picture look better than it really is.
• They don’t tell you everything. Financial statements only include aggregate information, so they don’t give you all the details. Plus, they only provide quantitative information. They don’t reveal any qualitative information, such as the company’s relations with its suppliers, behavior of top management, or morale of employees.
The Takeaway
These three main financial statements are useful tools for any business. The balance sheet looks at a firm’s financial health through its liquidity and solvency. The income statement reports a company’s profitability. And, the cash flow statement ties these two together by tracking sources and uses of cash.
Together, financial statements help you understand the financial health of your business and can guide you to making informed decisions for your company.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
What do business financial statements contain?
Business financial statements include information about the company’s finances, such as revenues, expenses, shareholder equity, and cash flow.
How do you obtain financial statements for your business?
You can generate financial statements using accounting software, which compiles data from your daily financial transactions. If you work with an accountant or bookkeeper, they can prepare these statements as part of regular financial reporting. Either way, generating financial statements on a regularly basis can help you keep tabs on your business’s financial performance over time.
What are the three most important financial statements?
The three most important financial statements are the balance sheet, income statement, and cash flow statement. The balance sheet provides a snapshot of assets, liabilities, and equity. The income statement (also called the profit and loss statement) shows revenues and expenses, indicating profitability. The cash flow statement tracks cash movements, showing how cash is generated and used. Together, these statements can give you a complete picture of a business’s financial health and performance.
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