Your accountant asks for your profit and loss statement. Your bookkeeper mentions cash flow. Your banker wants a balance sheet. If this sounds familiar, and your eyes glaze over at the mention of these terms, you’re not alone.
Many small business owners run the day-to-day operations of their company without regularly reviewing the three reports that tell the real story of the business’s financial health: profit and loss (commonly called a P&L), balance sheet, and cash flow statement. Together, they create a clear picture of the business, its financial stability, and its financing potential.
In this article, we break down each report to show what it is, what it tells you about your business, and why keeping it current is one of the smartest business decisions you can make. Whether you’re seeking a loan, formalizing your business practices, planning to sell, or just looking to make better daily decisions, understanding these financial statements gives you a strategic advantage.
Why financial statements matter
Think of financial statements like your business’s GPS system. Your car’s GPS shows where you are, your destination, and the route to get there. Financial statements do the same for your business. They are critical tools because they give you the information you need to stay on track.
Keeping these reports current allows you to make smart day-to-day decisions, prepare for financing now or down the road, and show potential buyers exactly where your business stands.
The three financial statements your business needs
There are three primary financial statements every business should maintain. Each one tracks a different aspect of the business and helps you evaluate the business as a whole.
Profit and loss statement
The profit and loss (P&L) statement, also known as an income statement, shows how much money came in, how much went out, and what’s left for a specific period, typically monthly, quarterly, or yearly.
The P&L statement follows a simple formula: Revenue minus expenses equals the net profit or loss for the specified period.
This report helps you understand whether your business is profitable, which periods perform best, and where your largest revenue streams come from and where your expenses are going.
Why this matters for your business: Not only do P&L statements reveal a lot about your business, they’re also the first thing a lender reviews to evaluate your business for financing. Potential buyers rely on it to determine whether a business is financially viable and therefore worth purchasing.
Take action: Set up a P&L using accounting software like QuickBooks, Wave, or Xero (we provide more detail on this below). These platforms generate reports automatically, making it easier to monitor performance, identify trends, and prepare for future opportunities.
Balance sheet
A balance sheet is like a financial photo of your business taken on a specific day. It outlines what your business currently owns (assets), what it owes (liabilities), and what’s left over (equity).
It goes beyond day-to-day operations to reflect the overall financial position of your business, including long-term assets and debts.
Why this matters for your business: Lenders rely on the balance sheet to evaluate risk and financial stability, while potential buyers, if applicable, use it to understand the assets and liabilities they’re acquiring.
Take action: Review an updated balance sheet monthly to stay current on your business’s assets, liabilities, and overall financial health.
Cash flow statement
Cash flow tracks money coming in (like customer payments) and going out (like payroll, bills, and inventory). It’s possible to have a negative cash flow in a given period while still showing a profit overall, which is why this statement is so important.
Why this matters for your business: Cash flow shows whether you have enough money to keep the lights on, pay your people, and handle surprises. It also helps you see slow periods coming before they hit. Lenders and buyers both look closely at cash flow to evaluate how sustainable your business really is.
Take action: Review your cash flow statement monthly and flag any periods where outgoing cash exceeds incoming cash, so you can make adjustments early.
How to set up business financial statements
For many business owners who are focused on daily operations, financial reporting can fall to the back burner. But ignoring these reports can create problems down the road, especially if you’re planning for financing or a future sale.
The good news is that you don’t have to figure this out alone. Bringing in an accountant, bookkeeper, or even a fractional chief financial officer (CFO) is one of the smartest moves you can make. A financial professional can help you build clean, accurate records from the start, saving you time, stress, and expensive fixes later.
Here’s how to get started:
- Step 1: Bring in a financial professional before you do anything else. They can assess your current records, recommend the right accounting software (like QuickBooks, Wave, or Xero) for your business, and set you up for success from day one.
- Step 2: Work with your financial professional to ensure your records are accurate and properly organized.
- Step 3: Schedule a monthly 30-minute review of all three reports.
- Step 4: Keep at least three years of financial statements organized and accessible.
- Step 5: Meet with a lender to understand what they’ll need if you plan to apply for financing or sell your business.
Turn financial clarity into smart business decisions
When you’re in tune with your business’s financial GPS—your P&L, balance sheet, and cash flow statements—you’re able to evaluate where your business is and where it’s going as well as any roadblocks, detours, or opportunities along the way.
When you consistently review all three financial statements, you gain a clearer understanding of your business’s performance and value, so you can act with confidence and make smart decisions moving forward.
Grow America helps small businesses get their financials in order, whether you’re preparing for financing or planning a future sale. Let’s work together to calibrate your financial GPS and prepare for anything that happens down the road.