Are you trying to get a loan or sell your business? The first thing a bank or investor will want to

see is your financial statements. There are two financial reports that Bankers and Investors ask

for, your Income Statement and Balance Sheet. Some institutions and investors may also want

to see your Statement of Cash Flows and Statement of Retained Earnings.

What do these financials show and why are they important:

#1 Income Statement

The income statement shows the how the business is performing for a defined period. Sales is

shown at the top and then cost of goods sold is subtracted showing your gross profit. All other

expenses are subtracted from your gross profit to show your net income at the bottom. This

statement is used to assess profitability and forecast risk so you can make better decisions on

where to invest your resources. It is important to compare your P&L statements to other

quarters and years to see any trends or identify problems.

#2 Balance Sheet

The balance sheet shows your company’s assets, your liabilities and your shareholders’ equity

for a determined period of time. Assets must equal liabilities plus equity. Cash and equivalents

are shown at the top of the statement (this should equal the balance found at the end of the

cash flow statement). All the changes from each major account for the period is displayed

below the assets. Net income from the income statement flows to the balance sheet as a

change in retained earnings. The balance sheet shows the financial position of your business. It

gives a financial picture of your company for a defined period.

#3 Cash Flow Statement

Net income is adjusted for any non-cash expenses. The cash flow statement displays the

change in cash for a defined period. It also gives the beginning and ending balance of cash. It

shows the movements of all cash (cash from operations, cash used in investing, and cash from

financing). This statement is important because it can catch discrepancies between revenue

and cash flow. Since it only shows the changes in cash balances, you can find items that might

be mismarked in your books.

#4 Statement of Retained Earnings or Owner’s Equity

Retained Earnings is sometimes referred to as shareholders’ equity. Retained earnings tracks

changes in your corporation’s stake over a period of time. This is the financial statement that

reports your accumulated profits after you have paid out any stockholder’s dividends. Most

business do not need this financial report and most banks do not ask for it.

While all the financial statements are important, most business owners focus solely on the

profit and loss. They want to see the bottom line; the net profit or loss. The problem with only

looking at the P&L is that it does not give you the whole picture. You must also look at the

other reports as they all relate together and give you the whole story so that you can make

informed decisions about your company.

Always check with an accounting professional if you do not understand your statements or if

something looks “off”.

Karrie Jackson

Co-Founder

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