These assets help show what resources your business has available to operate and grow.
What’s Included in Liabilities and Equity
Liabilities and equity show how your business is financed, either through borrowed money or owner investment.
Current liabilities (short-term):
- Accounts payable
- Wages
- Payroll taxes
- Employee benefits
- Short-term debt
Long-term liabilities:
- Loans and other debts not due within 12 months
Equity:
- The owner’s investment in the business
- Retained earnings (profits kept in the business over time)
Together, liabilities and equity balance against your assets and help show your company’s overall financial position.
Income Statement
An income statement helps you evaluate your company’s financial performance over a set period of time. It shows whether your business is making a profit or operating at a loss.
What Does an Income Statement Show?
The income statement, also known as the profit-and-loss statement (P&L), summarizes your company’s financial data and performance over a specific time period and compares it to prior periods. It helps you compare results over time and spot changes in revenue, costs and overall performance.
Revenue and Cost of Goods Sold
The income statement starts with revenue, which is the total income your business earns during a specific time period.
Next, you subtract the cost of goods sold (COGS) — the direct costs of producing your product or delivering your service, such as materials, inventory and labor.
This gives you gross profit, which shows how much your business earns before operating expenses.
Operating Expenses and Net Profit
After calculating gross profit, you subtract operating expenses, such as:
- Sales and marketing
- Rent and utilities
- Administrative costs
The result is your operating income, which reflects how your core business is performing.
From here, you subtract items like interest and taxes to reach your net profit (or net income). It’s the final amount your business earned after all expenses. This “bottom line” number helps you understand whether your business is profitable and how efficiently you’re managing costs.
Cash Flow Statement
A cash flow statement helps you understand how money moves in and out of your business over time. It helps give you a clear view of your available cash so you can plan for expenses, manage shortfalls and make more informed decisions.
What Does a Cash Flow Statement Show?
A
cash flow statement shows how much cash your business has at the start of a period, how much comes in, how much goes out and what remains at the end. It typically begins with your starting cash balance from a set period, such as a month.
Cash Inflows and Outflows
Next, you’ll list your cash inflows, which is the money coming into your business. This section of the spreadsheet can have as many lines as needed to capture all sources of incoming cash, such as sales, payments from customers or other income streams. To better understand how cash flows through your business, this overview of the
different types of cash flows explains how operating, investing and financing activities are categorized.
Then, you’ll track your cash outflows, which is the money going out of your business. This includes common expenses like:
- Cost of materials
- Wages
- Payroll expenses
- Rent
- Utilities
- Taxes
- Interest
You may also want to include a separate section for less frequent or non-operating expenses, such as:
- Equipment purchases
- Owner draws
- Transfers to savings or reserve accounts
Tracking Cash Position Over Time
To calculate your cash position, start with your beginning balance, add your inflows and subtract your outflows. The result is your ending cash balance for the period.
You can carry that balance forward to the next period and repeat the process to track changes over time.
- Reviewing your cash flow regularly can help you:
- Spot trends in income and cash spent
- Identify potential cash shortages early
- Understand where your money is coming from and going
Business financial statements include a few key components that help explain a company’s financial position and performance. Each business financial statement highlights important details like assets, liabilities, revenue, expenses and cash flow. At a high level, these components include:
- Assets: What the business owns, such as cash, inventory and equipment
- Liabilities: What the business owes, like loans or unpaid bills
- Revenue: The income the business earns from sales or services
- Expenses: The costs required to run the business
- Cash flow: How money moves in and out of the business over time
Together, these elements give a clearer picture of how a business operates financially.
The financial statements of a business work together to show how money flows through the company from earning revenue to managing assets and cash.
Here’s a simple way to understand the connection between the three statements:
- The income statement shows whether the business made a profit or loss over a period.
- That profit (or net income) carries over to the balance sheet, where it impacts the company’s overall value (equity).
- The same net income also helps explain changes in the cash flow statement, which shows how cash moved in and out of the business.
Together, these three statements provide a complete view of financial performance, position and cash health.
Financial statements help you understand how your business is performing and where it stands financially. They provide practical insights to help you plan for growth, manage risks and make smarter financial choices.
Financial statements can help you see:
- Profitability: whether your business is earning more than it spends.
- Cash health: if you have enough cash to cover expenses and keep operations running.
- Financial stability: how much you own compared to what you owe.
- Trends over time: whether your business is growing, staying steady or facing challenges.
Business financial statements are important because they help you track performance, make informed decisions and understand your company’s overall financial health. They also can help support everyday tasks like budgeting, securing funding and preparing for taxes.
By regularly reviewing your financial statements, you can spot potential issues early and identify new opportunities. To take this a step further, our
financial health checklist for small businesses can help you evaluate your company’s overall financial health.
Financial statements are helpful tools, but they don’t always provide a complete picture of your business. It’s important to understand their limitations when making decisions. Some common limitations include:
- Historical focus: Financial statements are based on past data, which may not reflect current or future conditions.
- Use of estimates: Some figures rely on assumptions or estimates, which can impact accuracy.
- Limited context: They don’t capture all external factors, like market changes or customer behavior.
- Snapshot in time: Certain statements reflect a specific moment and may not show ongoing trends.
- Non-financial factors: They don’t include qualitative insights, such as employee performance or brand reputation.
