Financial Statements
for your small business.
Here's what you need to know.

Financial Statements are a great tool for your small business.

You probably have a general idea of whether your business is doing well or not. Most people judge that based on their checking account. If they have cash left, they figure they're doing ok, if they don't have enough cash, they know something's wrong.

But do you know where your cash is going? Do you know how much you need to cover a month of expenses? Think about that for a minute. Do you really know?

Financial statements will show you.

Let's take a look. Over the next few pages I'm going to take a look at each financial statement in detail. But here, let's get an overview.

There are 3 basic financial statements. The Income Statement, the Balance Sheet, and the Cash Flow Statement.

With these 3 tools, you'll know how your small business is doing and what to do if it's not.

The Income Statement

The Income Statement is a report that shows your profit or loss for a specified period, usually a month, quarter, or year.

I'm assuming here that we're using the Cash Basis of Accounting, which you probably are if your business is small. That just means we report sales when we receive the money, and we report an expense when we pay it.

If we were using the Accrual Method of Accounting, we would report income when we make a sale, even if we get paid a month later, and we would report expenses when incurred, for example when we purchased it, not when we paid the bill.

Income Statements can show you a lot of things. Firstly, if you prepare an Income Statement for a month, it will show you what money you brought in, and it will show you what a month of expenses looks like. If you compare this month to the previous month, or even to several previous months, you can compare and see if some expenses are higher than "usual" in certain months. You can also see if there are any seasonal spikes or dips in your income.

The "bottom line", profit or loss, is what many people want to see. The term profit refers to what's left after you deduct your expenses from your income.

A Balance Sheet is a report prepared as of a date in time, not for a period of time, and it shows your company's assets, liabilities, and equity.

Just a reminder, assets are things you own, liabilities are things you owe, and equity is basically what's left, that is the value of your investment in your small business.

What can a Balance Sheet show you?

It will show you what the "value" of your business is in terms of 'we could sell our assets to pay off our liabilities and this is what we'd have left'.

When you go for financing, the bank is going to want to see a strong Balance Sheet in terms of more assets than liabilities, and a positive equity amount, which tells them that your business has had profits to retain.

The Cash Flow Statement

A Cash Flow Statement is a report that shows your cash activity for a period of time, usually for a year.

This will show you how much money your business earned and used from strictly business operations as well as from investing and financing activities.

You may say my business is small, I don't have any investing or financing activities. Well, you may. Investing activities could be selling a machine or truck as well as buying another business or investing in stocks. Financing activities could be paying on a loan or getting a loan, or selling company stock.

And this report will help you judge how you can better use your cash, whether it's to save cash or invest it.

More on that here:

Learn more about Cash Flow Statements.

That's a quick look at each Financial Statement. Click on the links above for a more detailed look at each, or use these: Income Statement, Balance Sheet, and Cash Flow Statement.

Also, check out this page on Cash Flow Analysis.