A business financial statement is a document that provides an overview of a business’s performance in a specific area, explains Inc. magazine. The three important financial documents commonly referred to as financial statements include the balance sheet, income statement (also known as a profit-and-loss statement) and cash-flow statement.
For publicly traded companies, the change-in-equity statement is also included as one of the financial statements they are required to file with the U.S. Securities and Exchange Commission each year.
The Balance Sheet
A balance sheet for a small business is simply a list of your assets and liabilities, which shows your company’s net worth. Assets can include cash, inventory, receivables, buildings, machinery and equipment. It’s what you would get if you sold off all of the parts of your company.
Balance sheet entries for liabilities include any unpaid bills you have, payroll owed, credit card and loan debt, and any other amounts you would have to pay if you liquidated your company. Small businesses should update their balance sheet each month so they know what the company is worth.
This is important because lenders often require a copy of your current balance sheet, and when you need cash, you don’t want to have to figure out how to create a balance sheet. Potential investors, business partners and anyone looking to buy your company will also want to see your balance sheet.
The Income Statement
An income statement shows how your business has performed, usually on a monthly basis. It lists your revenues and costs, gross profits, selling and administrative expenses, other income and costs, taxes you’ve paid and net profit for the period it covers, according to the Corporate Finance Institute.
Also known as a profit-and-loss (P&L) statement, it tells you (and others) how you performed last month, quarter or year and shows your performance in each of these specific areas. For many small-business owners, a monthly (or even weekly) P&L is critical to keeping on track financially.
Cash-flow statements show you what you paid, when you paid it, what you took in, and when you took it in. 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 is a critical accounting tool because it can show you that while you might be very profitable on paper, you could have trouble paying your bills some months, based on when your customers pay you and when your bills are due.
For example, let’s say your customers place orders worth $200,000. You need $70,000 to make the product, $30,000 to pay your employees to make the product and $15,000 to have a shipping company deliver the orders. This means you make a profit of $85,000.
However, if you offer your customers 45- or 60-day terms, you won’t receive that $200,000 in time to pay your suppliers (who might only extend you 15-day terms), your employees (who need to be paid next week) and the delivery company that requires you to pay on delivery.
A cash-flow statement lets you see when you’ll need money to pay bills, which will help you arrange for any extra credit you might need.