Understanding your numbers is a big part of running a successful business. Whether you’re applying for funding, evaluating your performance, or planning for the future, financial statements help tell the story of your business’s health. Here’s a breakdown of the three key statements every small business owner should know.
The Income Statement
Also known as the Profit and Loss Statement, the Income Statement shows how much money your business made—and spent—over a period of time (like a month, quarter, or year).
This statement typically includes:
- Sales (Revenue)
- Cost of Goods Sold (COGS) – also called cost of sales or direct costs
- Gross Margin = Sales – COGS
- Operating Expenses
- Earnings Before Interest and Taxes (EBIT) = Gross Margin – Expenses
- Net Profit = EBIT – Interest and Taxes
This statement gives you a clear view of your company’s profitability.
Download a sample Income Statement:
Income Statement Template (Excel)
The Balance Sheet
The Balance Sheet is a snapshot of your business’s financial position at a single point in time. It shows:
- Assets – What your business owns
- Liabilities – What your business owes
- Equity – The amount invested by the owners or shareholders
The formula always balances:
Assets = Liabilities + Equity
If this equation doesn’t hold, the numbers need adjusting. Balance Sheets are especially useful when preparing projections or estimating cash flow.
Download a sample Balance Sheet:
Balance Sheet Template (Excel)
The Cash Flow Statement
Cash is the lifeblood of your business. The Cash Flow Statement tracks how money flows in and out of your business and shows how much cash you have on hand at the end of a specific period.
It helps answer key questions:
- Are you bringing in more cash than you’re spending?
- How long can you stay in business if you continue at your current pace?
A positive cash flow means your business is bringing in more cash than it spends. Negative cash flow means the opposite—and could be a red flag.
How to Use a Cash Flow Statement
The Cash Flow Statement can help you:
- See if your business is gaining or losing cash over time
- Calculate cash runway (how long you can operate before running out of cash)
- Prepare for funding conversations—many lenders require positive cash flow
There are two types of Cash Flow Statements:
Indirect Cash Flow Statement
This version starts with your net income and adjusts for items like depreciation and changes in accounts receivable or payable. It’s commonly used and easy to generate using accounting software, but less ideal for forecasting.
Direct Cash Flow Statement
This simpler version totals all cash received and all cash spent, then compares the two. It’s more intuitive and easier to use when projecting cash flow.
Learn more about cash flow statements:
Investopedia: What is a Cash Flow Statement
How the Three Statements Work Together
Together, your Income Statement, Balance Sheet, and Cash Flow Statement create a complete financial picture:
- The Income Statement shows sales and profits
- The Balance Sheet shows what you own and owe
- The Cash Flow Statement shows whether you have cash to keep going
Cash doesn’t always follow profit. For example, a sale might appear as revenue on your Income Statement, but if the customer hasn’t paid yet, the cash hasn’t actually come in. That’s why it’s important to track all three statements.
The basic formula remains:
Ending Cash = Starting Cash + Money Received – Money Spent
Need Help?
Financial statements can feel intimidating, but they don’t have to be. Our team of Business Strategists can help you understand your numbers and connect you to tools and templates that make it easier.