Financial Statements for Small Business Owners

Michelle Browne - 02/27/2024

You are on top of your numbers, your records are up to date and now you're trying to understand the health of your business, the story your numbers are telling. This is where your financial statements come into play and can help you understand and make informed decisions regarding your business. 

There are three major financial statements every small business owner should familiarize themselves with: 

• Balance Sheet

• Income Statement 

• Statement of Cash Flow

Let's review each one in detail together below to help you become more knowledgeable and feel more comfortable when reviewing these statements. If you aren't yet, you should be reviewing your financial statements monthly as part of your month end close standard operating procedures (SOP).

Balance Sheet

The balance sheet is a snapshot of your business's financial health at a specific point in time, imagine it as taking a picture of your assets, liabilities and equities at a specific point in time to see how everything adds up. The basics elements of the balance sheet are made up of:

• Assets: Are anything a business owns with quantifiable value, with the expectation that it will yield future benefit. Assets include tangible or physical assets (trucks and vehicles, inventory, real estate, equipment, etc.), as well as intangible assets or items that can't be touched (trademarks, patents, etc.). Cash itself, including checking, savings, petty cash and investments a company makes are assets. A businesses assets are divided into current (short-term) and non-current (long-term).

• Liabilities: Are amounts a business owes to other parties, in other words your business's financial obligations. These are things like loans, rent, money owed to vendors for supplies and materials, payroll, taxes, etc. Liabilities also include the obligations your business has committed to provide goods or services to customers in the future. Liabilities, like assets, are split into current (short-term, usually those that will be paid off in 12 months or less) and non-current(long-term, liabilities that are due more then 12 months away).

• Equity: Equity is sometimes called owners equity, capital or net worth, you might see it as shareholder's equity if looking at financials for a publicly traded company. This is the difference between assets and liabilities and references the true value of a business, essentially the money that would be left if a business sold all of it's assets and paid off all its liabilities. This "leftover" money belongs to the shareholders, or owners, of the company. 

The below formula summarizes what a balance sheet shows: 

ASSETS = LIABILITIES + EQUITY  

A business's total assets have to equal, or balance, the sum of its total liabilities and total equity, this is a defining feature in the double entry accounting system. 

See below for a sample Balance Sheet.

Income Statement

The income statement, sometimes referred to as a Profit & Loss (P&L) statement, is a look at your business's revenue and expenses over a specific period. Where the balance sheet is a snapshot (picture at one given moment) the income statement looks at the total of your revenue and expenses over a set length of time. It is the statement that tells you whether your business is turning a profit or incurring a loss of that period of time, hence the name Profit & Loss. Though the technical and proper name for this statement is the Income statement, you can and will likely see P&L used interchangeable in some situations. 

Income statements for a small business will generally include the following information: 

• Revenue: The amount of money coming into your business, generally through sales of services or goods.

• Cost of Goods Sold (COGS): The cost of producing the goods your business sells or the cost of component parts (bill of materials) of what it takes to make the goods your business sells.

• Gross Profit: This is your total revenue less Cost of Goods Sold (COGS)

• Expenses: The amount of money a business spends or the costs associated with running your business, supplies and materials, utilities, rent, payroll, etc. 

• Operating Income: This is your Gross Profit minus your operating expenses

• Income before taxes: This is your business's operating Income less non operating expenses, sometimes shown as Net Other Income.

• Net Income: This is your income before taxes less your taxes or your net operating income less your net other income. 

See below for a sample Income Statement (Profit & Loss)

Statement of Cash Flows

The statement of cash flows purpose is to track and report in detail what happened to your business's cash during a specific period of time. It gives you a picture of your business's ability to operate short and long term, based on the cash flowing in and out. 

There are three sections in a statement of cash flow:

• Operating Activities: This is the cash generated from day to day business operations. A business should produce most of its cash inflow from day to day operations, which it can sustain over months and years.

• Investing Activities: This the cash flow related to purchasing and selling assets, or purchasing and selling tangible and intangible assets.

• Financing Activities: This is the cash flow from raising capital (equity) or paying off debt (liabilities).

Your business cash from operating income should regularly exceed net income, this is because a positive cash flow speaks to a company's financial stability and ability to grow its operations. A negative cash flow can signal a red flag, that more cash is going out of your business than coming in. 

Sample Statement of Cash Flows