Financial statements may seem intimidating to small business owners, but they are required to make informed financial decisions. Let’s break down the different financial statements and provide practical tips on how to use them effectively. We aim to have you feel empowered to analyze your small business’s financial health with confidence.

Understanding financial reports help small businesses make informed decisions
Understanding financial reports help small businesses make informed decisions, leading to success and growth.

Financial statements are documents that provide a snapshot of your business’s financial performance. They consist of three main statements:

  1. The balance sheet
  2. Income statement
  3. Cash flow statement [3]

Each statement serves a specific purpose, and it gives you a holistic view of your business’s finances.

The Balance Sheet

Let’s start with the balance sheet. This statement shows the financial position of your business. It lists your assets, liabilities, and equity. Assets may include cash, inventory, property, and equipment, while liabilities encompass debts and loans. Equity represents the owner’s investment in the business. By analyzing the balance sheet, you can assess your company’s capability to pay its debts, the book value of your company, and the equity you have in your business.

The Income Statement

Next, we have the income statement, also known as the profit and loss statement. This statement details your business’s revenues, expenses, and resulting net income or loss. It provides insights into your business’s sales margin and profitability. By reviewing the income statement, you can track expenses, track tax deductions, examine profitable trends, and ensure a strong net income.

The Cash Flow Statement

Lastly, the cash flow statement tracks the flow of cash into and out of your business. It presents how your business generates and spends cash through operating activities, investing activities, and financing activities. By examining the cash flow statement, you can assess your business’s ability to generate cash, meet financial obligations, and plan for future endeavors.

Coins with balance sheet
Financial statements may seem intimidating to small business owners, but they are required to make informed financial decisions.

Financial statements provide valuable information for making informed decisions, setting goals, and developing strategies. Here are four practical tips that will help you effectively use financial statements:

  1. It’s important to compare financial statements over time. Look for trends and patterns to identify areas of improvement or concern. For example, if your expenses are consistently increasing, it may be time to explore cost-saving measures.
  2. Calculate key financial ratios. Ratios such as the current ratio (current assets divided by current liabilities), the gross profit margin (gross profit divided by revenue), and working capital turnover (net sales/working capital) can provide insights into your business’s liquidity, profitability, and efficiency.
  3. Benchmark your business against industry standards. Research industry averages for key financial ratios and compares your business’s performance. This can help you identify areas where you excel or areas that need improvement.
  4. Seek professional help if needed. If financial statements still seem daunting, consider hiring an accountant. They can guide you through the process, explain complex concepts, and help you make informed decisions.

Let’s use an example. Imagine you own a small boutique and notice a decline in sales over the past quarter. By analyzing your income statement, you identify that your expenses have increased significantly. With this information, you can make informed decisions to cut unnecessary costs, negotiate better deals with suppliers, or explore fresh marketing strategies to boost sales.

Ready to dig deeper?

Our Entrepreneurship team holds no-charge webinars to help you unlock your potential as a small business owner.  Tracy is holding one on Sep. 21, 2023 on understanding the Profit & Loss Statement and the story it tells about your business.  Join us as we discuss the difference between bookkeeping and accounting (one involves data entry the other, business analysis), the elements of the income statement, the difference between cash and accrual accounting, and finally, we’ll explain just what the heck depreciation and amortization are!


As you’re operating, financial statements become a requirement for small business owners. They provide insights into your business’s financial health, guide decision-making, and help you set achievable goals. By understanding financial statements, you can make informed financial decisions that will contribute to the success and growth of your small business. Don’t hesitate to seek professional help if needed, as accountants can provide expertise and guidance.

Financial statements are necessary documents that you will need when it’s time to file taxes and seek financing for future endeavors.

Tracy Cook

Tracy Cook

Communities Unlimited
Management Consultant