5 Key Financial Documents that All Business Owners Need

Here’s why these five financial documents are essential to your small business

The five key documents include your profit and loss statement, balance sheet, cash-flow statement, tax return, and aging reports. When you update and maintain these documents, you’ll be able to ask the right questions and find answers that are specific to your business, such as:

• Are your business revenue flows consistent, or are your sales and services more cyclical?
• Is your business profitable, breaking even, or losing money?
• Which items and services generate the most profit and which are loss leaders?

Your financial documents can help you develop smart, data-driven strategies for everything from staffing and inventory management to expansions or mitigating losses. You’ll be able to see if, how, and when it’s wise to invest in new equipment or to take out a loan to cover cash flow crunches. Having these documents updated will also better prepare you to apply
for funding, add partners, or take on investors.

For the most part, these documents are available through your business’s bookkeeping software. You can also request them from your bookkeeper, certified public accountant (CPA), or tax professional.

1. Profit and loss (P&L) statement

A profit and loss (P&L) statement, also referred to as an income statement, is used to evaluate your current financial condition and your prospects for growth. A P&L summarizes revenues generated by your business and your expenses over a specific period of time. Whatever’s left after the expenses are deducted is your profit. If your expenses are greater than your revenues, then your P&L shows a loss.

It’s not unusual for your business to show a loss at various times, like when you’re launching a new product or expanding your location. However, having continuous losses is a “red flag” because that shows that more money is consistently going out than coming in. When you stay on top of your financials, you can find these issues early on and address them effectively.

2. Cash flow statement

Did you know that 82% of  small business failures are due to cash flow problems? Regularly reviewing your cash flow statement goes a long way in keeping your business on the positive side of that statistic.

While a P&L shows money in and money out for a specific time, the cash flow statement is more like a budget. It’s used to forecast revenue in and expenses out over a period of time – often, about three years. This statement typically shows cash from your operations, investments, and financing.

Your business has fixed and variable costs that are paid from the money your business generates. Your cash flow statement shows whether or not you’re able to do this effectively.

Your cash flow statement helps you plan day-to-day and long-term investments and
gives your business’s owners, lenders, and investors an idea of your cash position. A lender will review your cash flow position when you apply for a loan. This will show them whether or not you have enough cash flow to cover the debt you want to take on in addition to any existing debt you have.

3. Balance sheet

Your business’s balance sheet shows how your business is doing at a particular point in time – quarter by quarter or year to year, for example. In your balance sheet you’ll find a simple equation: your business’s assets = your business liabilities + owner equity.

Assets can be short-term, such as money in your business checking account and
inventory that you expect to turn around quickly. They can also be long-term assets like real estate and major equipment. Similarly, liabilities are made up of short-term debts like costs for producing current goods and long-term debts, such as business loans. Your equity is the cash invested by you or investors as well as retained earnings.

4. Tax returns

You were likely familiar with tax returns before you even opened your business because you’ve filed them as an individual. When you run a business, it’s incredibly important to keep up with your business taxes, as well as any personal taxes that you may be liable for separately.

The tax form you file will depend on your business entity type, and there are different income tax impacts that apply to each. While a CPA or other tax professionals might file your taxes, it’s important that you review your return as well. It holds information that can help you and your financial team create growth strategies for your business. You’ll get insights like when to hire staff, buy equipment, or expand to new locations.

5. Accounts receivable/accounts payable 

Your accounts receivable and payable can also be referred to as an aging report. This report categorizes debts owed to your business, including the amount of time the debt is owed. “Accounts receivable” are the funds that are owed to your business, while “accounts payable” are the funds that your business owes to others.

In general, the older a debt is, the less likely it is that it will be paid. And if your business doesn’t get paid, you’ll lose money and impact your cash flow. 

Aging reports show you how much of your accounts receivable are overdue and how old they are so that you can follow up and take action to bring money in. On the other side, if you have bills that are overdue, your aging report will show you that you need to get caught up. Talk to your CPA and financial team about how to better manage expenses and streamline operations.

Use your small business financial documents to drive your success

With updated and accurate financial documents in hand, you can easily find growth opportunities and spot issues that may be draining resources. Thoroughly understanding and maintaining these documents also prepares you for critical conversations with potential lenders and investors.

If you’d like to learn more about how to create and use financial documents, or if you need business guidance from an experienced team, talk to Pursuit! Every day, we help businesses get the information, expert help and funding they need to succeed.