Many people associate financial statements with something complex, reserved only for big enterprises and scaling your business. Yet, everyone needs them, from a local corner shop selling groceries to a newly-founded startup.
The good news is that small business financial statements don't have to be complicated and won't be for you after reading this article. We'll show you how to do reports and provide some tips and recommendations for the best financial analysis software to automate the process for you. Plus, we have a surprise for you at the end!
What are small business financial statements?
Financial statements are formal records of an organization's financial activities and current financial status that provide valuable insights into its potential future performance.
They are the first step to understanding where you are before you start with small business financial planning and are frequently used for tax, financing or investment assessments.
Every small business needs three primary statements:
Balance sheet
Profit and loss (P&L) statement
Cash flow statement
Combined, they offer insight into a company's financial health and profitability and serve as the first step before financial forecasting for startups.
Small business financial statements: What to include
We'll now guide you through the essential financial statements for small businesses, helping you understand and create them.
Income statement or profit and loss (P&L) statement
We'll start with the Profit and Loss financial report, also known as the Income statement.
This financial statement is crucial for understanding your company's performance as it gives you insight into how profitable your small business is.
Your P&L financial statement should consist of:
Revenue
Cost of goods sold
Operating expenses
Interest income
Taxes
Net income
Other gains and losses
You can find most of this information in your accounting software, such as Xero or QuickBooks.
Here's how to do a P&L report manually:
Gather income information and list all sources of income, including sales revenue, service fees and interest earned.
Calculate your COGS (Cost of Goods Sold) by summing up the costs directly associated with providing goods or services, such as the cost of materials, labor, manufacturing etc.
List all operating expenses, including salaries, rent, utilities, marketing costs etc.
Differentiate between fixed and variable costs (fixed are those that are the same regardless of sales volume, for example, your rent, while variable costs fluctuate every month depending on your sales or production level).
Calculate the gross profit by deducting the cost of goods sold from your total revenue.
Subtract your operating expenses from the gross profit to calculate operating profit.
Calculate the net profit or loss and format your table with columns for income, expenses and totals.
If this sounds too complicated, don't worry. You can automate your P&L statements with Fuelfinance, one of the best FP&A software today, that will update your data in real time.
Here are two important rules to remember when it comes to P&L statements:
The P&L statement should adhere to an accrual basis. This means recording revenues when earned and expenses when incurred, regardless of when the payment happens.
It's always better to be safe than sorry – that is why you should constantly compare your current P&L statements with prior periods, planned or budgeted figures, and the corresponding month from the previous year (particularly relevant for seasonal variations) to notice any changes.
Now, you may wonder how often you should analyze your P&L statements. The answer is simple – you should perform this task monthly, ideally by the 5th day of the month. This will require approximately one hour to finish, even less if you're using dedicated financial management solutions.
Here's the best way to analyze your Profit and Loss statement that we suggest to our clients:
For both venture-backed (revenue) and profit-generating (net income), you should include Plan/Actual analysis and month-over-month percentual change.
Analyze your key month-over-month changes.
Always analyze the largest expenses in your Profit and Loss statements and how they change each month.
You should analyze the most prominent Plan/Actual deviations.
With these insights, conduct the planning for the next month. You can start either with the profit, if that is your primary goal, or with the revenue by establishing the key drivers.
Cash flow statement
Although they are separate financial statements, P&L and cash flow statements often go hand in hand. You need a P&L statement to understand your startup's valuation and essential expenditures and a cash flow statement to understand burn rate and runway or how much money you need to raise or invest in your business.
Cash flow statements include three crucial elements:
Cash flow from operating activities: They include all revenues and expenses connected with a key business activity, e.g., all salaries, sales and marketing expenses etc.
Cash flow from investing activities: As a startup founder or a small business owner, you might consider purchasing physical assets (like office space or equipment), investing in securities (like stocks or bonds) or selling securities or assets – these are your investing activities. Most of these activities happen during the first year of the business, and they are usually not repeatable expenses.
Cash flow from financing activities: They include cash earned or spent in financing the company, such as loans, lines of credit, share buybacks, issuance of new shares, dividends and similar activities. For example, a positive cash flow from financing activities indicates that the startup has received more money from activities like borrowing loans or selling shares that it can invest in growing the business. On the other hand, a negative cash flow may indicate the company is spending more money on activities like repaying debt or paying dividends to shareholders, which is good for long-term growth.
There are two ways to create cash flow statements:
Directly: Simply sum up all the money received and spent by the startup within a specific period, like a month or a quarter. By comparing the starting and ending cash balances, we can see the net increase or decrease in cash during that time.
Indirectly: With this method, we take the net income (profit after deducting all expenses from revenue) from the income statement and add or subtract changes from non-cash transactions like depreciation or changes in inventory.
Making cash flow statements shouldn't be something you'll postpone for tomorrow when you start generating more money, but something small business owners should start doing from the first dollar spent or received.
Not tracking where and how your cash flows could give an impression that you aren't a startup or small business someone can trust and rely on, and the majority of startups fail because they are left with empty bank accounts.
Creating cash flow statements for your startup has numerous benefits, such as confirming your liquidity status and your capital cash position and assisting in improving cash management, both in the present and future. Also, cash flow data is a base for financial projections that you can later use with financial modeling software.
Balance sheet
Finally, the balance sheet is another must-have for managing your company's financial performance. It's a financial document that shows what your company possesses (assets), what it owes (liabilities/debt) and the money invested by shareholders (equity). This information helps us understand whether the company can cover its short-term expenses, pay its debts and provide returns to its owners.
Let’s break it down:
Assets: The items in this category can be organized from highest to lowest based on their liquidity, or in other words, how easily they can be converted into cash. They are categorized into current assets, which can be converted into cash within a year or less, and non-current or long-term assets, which cannot.
Liabilities: A liability refers to any financial obligation owed by a company to external entities, ranging from payments due to suppliers and interest on bonds issued to creditors to expenses such as rent, utilities and salaries. Current liabilities are those that have to be paid within one year and are listed in order of their maturity date, while long-term liabilities are payable beyond the next twelve months.
Shareholder's equity: This component represents the funds belonging to the owners of a business or its shareholders. This equity can also be referred to as net assets, and it equals the total assets of a company minus its liabilities or debts owed to non-shareholders.
Here are three reasons you need to create a balance sheet:
Determining risk: As it outlines all of a company's assets and liabilities, balance sheets allow small business owners to promptly evaluate whether they had borrowed excessively, whether their assets lack liquidity and whether the company holds sufficient cash reserves to fulfill current obligations.
Securing capital: Typically, a company has to provide a balance sheet to a lender to obtain a business loan. Similarly, when seeking private equity funding, a company must provide a balance sheet to private investors. In both cases, the external party seeks to evaluate the company's financial condition, its creditworthiness and its ability to settle short-term debts.
Attracting and retaining top talent: Employees typically want to know the stability of their positions and the overall well-being of the company they work for. The balance sheet gives them an opportunity to review the company's cash reserves and see whether its financial health aligns with their expectations from their employer.
If all this sounds too complex and time-consuming, don't worry. Today, there are many financial planning software tools to help you eliminate repetitive work and room for errors.
Financial statements are one of the most common outsourced financial services for a good reason: they require expertise and knowledge, and many business owners prefer to delegate them to professionals to make sure they stay compliant with all financial regulations.
Generating small business financial statements with Fuelfinance
When we start working together, you'll get a dedicated financial expert who will review all your company's data and arrange a brief call. You'll be given a list of questions in advance so you can prepare for the call and get the most out of your time.
After that, we'll prepare financial statements you can check in the app and get a complete financial view of your startup or small business.
But that's not where our help ends.
Our experts will guide you through the financial planning process, showing you how to do financial analysis, so you can develop a P&L budget and a cash flow budget.
You can also expect precise financial forecasting, as you set clear goals and measure them on a monthly basis using different types of analysis. We also schedule monthly calls to keep you updated with all the changes that might have happened.
Additionally, you'll also be able to see Actual vs. Estimated performance.
Based on your unique startup financial model, we'll suggest certain advanced features, such as personalized KPIs, revenue and cost trends, extended dashboards and others.
Finally, you can get 24/7 support through a personalized Slack bot that will provide you with technical support, monthly summaries, monthly reports and dashboard updates. Whenever you have questions or need advice, you can contact our expert team, who is acting as your outsourced CFO.
Why do you need small business financial statements?
Financial performance evaluation: Financial statements are the most accurate way to evaluate your company's financial status and performance. They allow you to assess profitability, liquidity, solvency and operational efficiencies, giving insights into areas needing improvement.
Better cash management: Having, updating and analyzing financial statements makes sure that in every moment, you know how much money you have and what you're spending it on. Keeping track of your cash flow makes it much easier to manage your expenses and allocate your funds.
Investor confidence: Financial statements help you gain the trust and confidence of stakeholders, including investors, lenders, shareholders and regulatory bodies. They promote transparency and accountability, and they're usually required before an investor makes a decision to provide you with funding.
Compliance with legal and regulatory standards: Keeping your financial statements up-to-date helps you stick to laws and regulations and mitigate the risk of penalties or legal implications.
Ready to up your financial reporting game?
Financial statements and reporting are an essential part of small business financial management. Yet, so many founders struggle with them and put them off.
That's why we've created Fuelfinance – a user-friendly financial tool that will automate this process for you and provide you with real-time financial data at any moment.
With our software and expert team to support you, you won't have to worry about your small business's financial health anymore.
Book a demo call to see how we can organize your finances and increase your profitability.
FAQs
What are the 3 primary financial statements prepared for small businesses?
The three main small business financial statements are:
Profit and Loss statement (showing revenues and expenses over a specific period)
Cash flow statement (showing cash inflows and outflows)
Balance sheet (showing a snapshot of assets, liabilities and equity at a given time)
Does a small business need a balance sheet?
Yes, small businesses need a balance sheet as it provides insight into their financial health in terms of assets, liabilities and equity at a specific point in time. It may be simpler to calculate than those of large companies, but it's nevertheless very valuable.
How do you make a balance sheet for a small business?
First, generate your financial data, such as assets, liabilities and equity. In one column, list all your assets (such as cash, inventory etc.), and in the other one, list all your liabilities (such as loans, accounts payable etc.). To calculate equity, subtract liabilities from assets and organize this information into a format that aligns with standard accounting principles and regulations in your state.
