As a small business consultant, I am frequently asked what are financial statements and which ones do I need? It is important to understand that each and every statement has purpose and contains valuable information about the financial health of your company. Comparing month to month and year to year financial statements gives even a better picture and understanding of your company. Learning about these financial statements and becoming familiar in how to use them will help you grow your small business.
The four basic financial statements:
- The Income Statement, or also known as the Profit and Loss (PNL)
- The Balance Sheet
- Statement of Cash Flow
- Statement of Owners Equity
*NOTE: All financial software for small business should be able to create these statements easily and quickly.
The income statement or profit and loss statement should be your “go-to” statement to determine how your business is doing week to week, month to month and year to year. It easily shows your sales or revenue, the expenses and then the bottom-line, otherwise known as the profit or loss. It can quickly show a lender or investor that you are either profitable, or not. It provides the detail by category on where the revenue comes from and where it goes.
The balance statement is another very important statement that is required by lenders. A balance statement is really easy to understand. It contains 3 separate sections that are best represented as an equation. Assets = Liabilities + Owner’s Equity. This is why it is called a balance sheet. Assets must always = Liabilities + Owner’s Equity. This statement can quickly provide lenders and or investors a break down of all assets, liabilities and the owner’s equity and retained earnings in the company.
The statement of cash flow is exactly that. A statement of cash flow can help any lender or investor to quickly see the inflow and outflows of a small company over a specified time. When you look at this statement as a graph over the year, one can easily see what months were the best and worst for revenue and expenses.
The statement of owner’s equity is the final statement that is usually required by lenders and investors. For small business needs, this statement is almost always satisfied in the section of the balance sheet called owner’s equity. But in some cases, more detail is needed. The purpose of this report is to show changes in owner’s equity over a specific period of time.
If you would like help in small business advice and talking through difficult questions with an independent consultant, the Small Business Development Center at University of Mary Washington can help. If you are a client, please contact your consultant to schedule an appointment. If you are not already a client, you may register for free, confidential business assistance by completing a Request for Consulting form on our website, umw.edu/sbdc.