We talk a lot about various financial statements here on the Kashoo blog. As such, we often hear the follow question: “Which financial statements are the most important?” Well, while it may vary slightly from business to business and between industries, there are three that are pretty universal and, thus, pretty important!
The Profit and Loss Statement
The profit and loss statement shows revenues at the top, expenses in the middle, and profit (aka, the bottom line) at the bottom. This report gives insight into a company’s profitability. It also puts forth the number (profit) that is used to determine a business’ tax obligations. A P&L statement, as it’s often called, can take on any date range, but the most typical are monthly, quarterly and annually. (The annual P&L often measures a company’s fiscal year and is thus used for tax purposes.)
The Balance Sheet
The balance sheet is a standard. From a high level, a balance sheet shows a business’ financial position over a specific timeframe. It shows what a company owns (aka, assets) and what it owes (aka, liabilities). Third parties often seek a balance sheet. Think bankers considering issuing a loan to a business or investors who are thinking about backing a company. We’ve got a quick guide on how to read a balance sheet.
The Cash Flow Report
If the balance sheet and P&L statement offer more “snapshotty” type views, the cash flow report is much more real time. This report tells you what was earned and what was spent. It’s a prediction of how much cash a business has on hand at a given moment. The cash you have depends on how efficiently you can collect revenue and must include all of your overhead expenses, your loan payments, and your depreciation.
Learn about the difference between profit and cash flow.
So while there are numerous financial reports, it can be said with relative certainty, that if you have these three, you’ll have a solid view of your business’ financial status.