3 financial statements you need for your small business

There are three financial statements that can give you a comprehensive view of your business’s financial health: the income statement, the balance sheet and the statement of cash flows.

Together, these important statements can help you—as well as your investors, lenders and other stakeholders—make informed decisions about your business’s performance and risk. Here’s an in-depth look at each type of financial statement and what it reveals about your company’s financial position.

What you’ll learn:

• The balance sheet, the income statement and the statement of cash flows are the three main types of financial statements for businesses. 

• The balance sheet provides a clear view of your company’s assets, liabilities and equity at a specific point in time.

• The income statement enables you to see your business’s revenue, expenses and profits or losses over a specific period.

• The statement of cash flows reveals cash coming in and going out of the business, categorized into operating, investing and financing activities.

Businesses of all sizes can use their balance sheet, income statement and cash flow statement as tools to gain a deeper understanding of their financial performance. By reviewing these three key financial statements together, you can:

• Make better decisions: With a clear view of your company’s financial position, you can budget more effectively, set pricing, evaluate investments and plan for growth more accurately—with fewer surprises in the future. 

• Identify areas in need of improvement: Financial statements can help you track your business’s performance by measuring profitability and cash flow. This makes it easier to spot trends and learn where improvements are needed. 

• Attract lenders and investors: Your potential lenders and investors use financial statements to evaluate your creditworthiness and growth potential—they want to see how financially sound your company is before lending to or investing in it.

• Comply with tax, accounting and legal requirements: Financial statements often form the basis for tax filings and help meet other regulatory, accounting and legal requirements.

Your business’s balance sheet offers a quick view of what your business owns and owes—and the stakeholder value—at a specific point in time, usually the last day of a reporting period. Consider it a financial snapshot. Because it shows your business’s current financial position but doesn’t reveal trends on its own, you’ll need to compare balance sheets across multiple periods to see changes over time.

The core components of the balance sheet are assets, liabilities and equity. Here’s a quick breakdown:

• Assets: Assets are what your business owns. They can be current—the short-term resources your business uses within a year—or noncurrent, like long-term investments such as property and equipment. Assets can also be tangible—like inventory and furniture—or intangible, such as intellectual property and trademarks.

• Liabilities: Your business’s current liabilities are obligations due within one year, such as credit card debt, loans, staff wages and accounts payable like vendor payments. Long-term liabilities are debts due in more than one year, including certain loans and future tax payments.

• Equity: Equity, or shareholders’ equity, shows the difference between your business’s assets and liabilities. It can include retained earnings and owner’s capital. 

Typically, you can format a balance sheet by listing assets first, followed by liabilities and equity—also called shareholders’ equity. In some cases, assets are placed on one side of the balance sheet, while liabilities and equity appear on the other side. The total of liabilities and equity should equal total assets, expressed by the formula:

Assets = Liabilities + Equity

Here’s an example of a balance sheet for a small business:

Following the basic accounting equation for Barb’s Bakery, we get:

Assets = Liabilities + Equity

$35,000 = $4,000 + $31,000

The income statement, also known as the profit and loss (P&L) statement, shows whether your business earned a profit over a specific period—such as a month, quarter or year. It helps you understand how efficiently your company operates, where improvements may be needed and how well your business stacks up against competitors. It also shows stakeholders how effectively the business is generating income while managing costs.

An income statement includes several key metrics that provide a snapshot of your business’s revenue and expenses. Here’s a look at these components:

• Revenue: Revenue is the total amount of money your business earns during a specific period. It may also appear as sales on the income statement, and it can be broken down into operating and nonoperating revenue. 

• Cost of goods sold (COGS): COGS represents the direct costs of producing the goods or services your business sells, like raw materials and labor. 

• Gross profit: You can calculate gross profit by subtracting COGS from revenue. This shows how much profit remains after covering production costs. 

• Expenses: Business expenses are the costs associated with running your business. They include rent, utilities, employee salaries, administrative costs and more.

• Operating income: Also known as earnings before interest and taxes (EBIT), operating income equals your gross profit minus your operating expenses. It represents the profit from your core business operations, before interest and taxes. 

• Net income: Net income, also known as net profit, reveals your company’s bottom line—the total profit remaining after all expenses are covered. 

Here’s a look at the income statement for Barb’s Bakery:

After covering all costs and expenses, the income statement shows that Barb’s Bakery earned $33,000 in profit for the year.

The cash flow statement is the third type of financial statement for a business. It shows the actual movement of cash coming in and going out of your business during a specific period. It’s a valuable report to have, as it highlights how well your business manages its cash, covers expenses and debts, and supports ongoing growth.

The cash flow statement includes three sections of activities: operating, investing and financing. Here’s a brief overview of each:

• Operating activities: Operating activities include the cash your business generates from daily operations. It typically begins with your net income, then gets adjusted to reflect noncash expenses—like depreciation—and shifts in working capital, such as accounts receivable and accounts payable. It shows the actual cash your business generates and uses for payments that go to vendors, rent, utilities and employee wages. 

• Investing activities: Investing activities show the cash your business uses to purchase long-term assets—cash outflows—like equipment that supports your company’s growth. Cash inflows come from selling long-term assets or investments. 

• Financing activities: Financing activities include cash coming into and going out of the business from investors, creditors or owners. Your business’s cash inflows may include loans or capital contributions, while its cash outflows may include loan payments or owner withdrawals. 

When all three sections are combined, you’ll see the net change in cash, which gives you the ending cash balance for the reporting period. 

Here’s a look at a cash flow statement for Barb’s Bakery:

This cash flow statement shows that the cash and cash equivalents from Barb’s Bakery totaled $35,500 at the end of 2024.

The three types of financial statements help provide your business—and your lenders, investors and other stakeholders—with a structured view of your company’s financial health. The balance sheet shows what you own versus what you owe, the income statement tracks your profitability over a period of time and the statement of cash flows reveals where cash actually came from and went—showing your total ending cash balance.

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