GET TO KNOW THE THREE MAIN TYPES OF FINANCIAL STATEMENTS: INCOME STATEMENTS, BALANCE SHEETS AND CASH FLOW STATEMENTS
The money coming into your business is an important part of your company’s financial standing, but it takes more than strong revenue to grow your business. To make sure the money you receive can cover your expenses, you need a solid understanding of financial statements and how to use the information they provide to guide your decision making.
Your company’s income statement, balance sheet and cash flow statement will help you determine the amount of money coming in and going out of your business, as well as any debts you owe and whether you’re generating a profit. Together, these elements will give you a picture of your company’s overall financial health. Here’s what you need to know about these three financial statements and how to use them to grow your business.
The three main types of financial statements
Each of these documents includes different information, but analyzing them together can help you determine your operational expenses, project your financial trajectory and even spot trends, like when costs are highest or lowest. Here’s a quick breakdown of each type of statement.
An income statement, also known as a profit and loss (P&L) statement, provides a picture of your company’s overall financial performance by summarizing revenue, expenses, profit and net earnings. An income statement will show you how much your business made and spent over a specific period of time, giving you a clear picture of your company’s overall profitability in relation to its expected performance. The income statement can be a useful tool in evaluating where you may want to set new goals to improve performance.
The last line on the income statement reveals your company’s net earnings once all expenses have been accounted for. This figure helps to inform the other two financial documents — the balance sheet and the cash flow statement.
A balance sheet gives a snapshot of the company’s assets, liabilities and shareholders’ equity. This document shows you what resources are available and how they were financed at a specific point in time, but does not detail the flow of money in and out during that period. Analyzing the balance sheet will give you insight into key metrics, like the amount of working capital available and debt to equity ratio, and help you gain a better understanding of your company’s overall value.
A cash flow statement details your company’s inflows and outflows of cash during a period of time. It’s similar to an income statement, but it has a different purpose. The income statement tells you if your company made a profit, while the cash flow statement tells you whether your company generated or lost cash and your ability to support ongoing operating expenses. The cash flow statement offers insight into your company’s ability to operate in the short and long term based on how much cash is coming in and going out.
All three documents reveal different information about your business, but when used together paint a picture of your company’s financial position. The income statement offers insight into the activities that generate income, while the balance sheet and cash flow statement provide information about assets and the overall structure of your business. Reviewing these documents regularly can help you create a successful business strategy and inform your business decisions.
Managing your company’s finances can seem overwhelming at times, but understanding these core financial documents will help you determine your company’s financial health so you can keep your business growing.