As a small business (SMB) owner, you combine imagination and organization to deliver truly amazing products.
While imagination is important to launch your business, organization is fundamental to maintain it. This is especially true for immigrants entering an economy beset by high inflation and even higher interest rates.
Thankfully, a bit of strategic paperwork can go a long way to protecting your business’ future.
In this short guide, we will introduce the five key financial documents that you need to build a resilient business.
Small Business Financial Management: Why It Matters
When it comes to entrepreneurship, success and failure are separated by a thin margin.
According to recent studies, over 20% of small businesses close within their first year of operation. Nearly 49% of businesses fail within five years, while over 65% shutter within a decade.
What’s the secret to finding success (and avoiding failure)?
Though numerous factors are at play, one element remains integral to longevity: being disciplined with your paperwork.
Can paperwork really provide the ballast your business needs to succeed?
Absolutely! In fact, these documents can even help you secure loans and attract new investors.
Here are five financial documents every SMB owner should have.
5 Financial Documents for Entrepreneurial Success
Financial terminology can be confusing.
Though some of the following terms may seem similar, they each have distinct applications.
As we’ll discuss, a small business’ financial statement comprises three key components: the income statement, the cash flow statement, and the balance sheet.
While each financial document provides essential information, the income statement establishes the foundation of a company’s operations.
1. Income Statement
How profitable is your business?
That’s the question an income statement seeks to answer.
Also referred to as a “profit and loss statement” (P&L), your income statement summarizes your company’s revenue and expenses over a reporting period (monthly, quarterly, or annually).
You can easily calculate this number:
- Add up all your revenue-generating sources to get your total revenue.
- Deduct the “cost of goods sold” (i.e., raw materials) from your total revenue. This will determine your gross profit.
- Deduct your operating expenses (i.e., salaries and rent) from your gross profit. This will provide your operating income.
- Once interest, tax, and depreciation (EBITDA) are deducted from your operating income, you’ll have your net profit.
As an example, let’s say Anika opened a new coffee shop downtown. She sources her beans from Colombia at a cost of $4,000 a month.
In the month of August, she sold $20,000 worth of cappuccinos, lattes, and cold brews.
If we subtract the cost of goods sold (the coffee beans) from the total revenue, we find a gross profit of $16,000.
Of course, Anika also employs two baristas ($3,000 a month), pays rent ($2,500 a month), and also uses a marketing agency to manage her shop’s social media accounts ($1,500 a month).
Therefore, her total operating expenses are $7,000 a month.
If we subtract that figure from her gross profit ($16,000 — $7,000), we find that Anika earns $9,000 in operating income. Once her taxes are factored in, she’ll have her net profit.
So, what are the benefits to having an income statement?
For starters, it helps reveal whether your business is making or losing money. The calculations are easy to complete, and the numbers never lie.
In Anika’s case, she’ll not only see that she’s profitable, but she’ll also find that she has surplus capital to expand operations, to hire more employees, or to invest in the stock market.
Even if Anika found that she lost money in August, her income statement would still be helpful.
After all, it would reveal places to reduce operating costs until her coffeeshop regains profitability.
Finally, an income statement also has external business value.
Here’s why: if you’re looking to attract new investors (or sell to a buyer), your income statement will likely be the first document reviewed. As they evaluate your business plan, investors look at two key numbers: how much you’re spending and how much you’re earning.
Your income statement helps you tell that story.
Free resource: income statement template.
2. Cash Flow Statement
Where your income statement assesses profitability, your cash flow statement determines your ability to meet financial obligations.
As such, your cash flow statement is considered a measure of liquidity.
While it may seem that profit guarantees cash flow, that correlation remains imperfect at best. Indeed, many businesses achieve soaring profits while simultaneously deprived of cash.
That’s why a cash flow statement is so valuable: because it helps you identify both where your business is creating cash and where it’s getting spent.
Your cash flow statement can also help you create a budget, forecast revenue and expenses, and build confidence that your financial obligations will be met.
By tracking cash inflows and outflows on a daily basis, your cash flow statement declares your current cash balance (i.e. the amount of money you have on hand) at any given time.
A standard cash flow statement is comprised of three components:
- Operating activities: cash flow derived from net profits (or losses).
- Investment activities: cash flow derived from the purchase or sale of long-term assets (i.e. property, equipment, and investment securities.
- Financing activities: cash flow derived from credit products and capital contributions.
Here’s how this plays out in practice.
Let’s say Carlos manages a restaurant with $5,000 cash on hand. While he keeps most of that money in the bank, he leaves some in the cash register.
In addition to his opening balance, Carlos earns another $10,000 in operating activities from customers, $2,000 in investment activities from the stock market, and $3,000 in financing activities from business loans.
Therefore, Carlos’s cash flow statement would show that he has a total of $15,000 on hand—more than enough to cover his $8,000 in operating expenses.
Cash flow is integral to any company’s longevity.
Free resource: cash flow statement template.
3. Balance Sheet
We’ve arrived at the last of the “big three” small business financial statements: the balance sheet.
While cash flow statements reveal liquidity, the balance sheet states what a company owns and owes—typically at the end of a quarter or year.
As the name implies, a balance sheet balances your assets with your liabilities and equity.
The formula is simple:
Business Assets = Business Liabilities + Owner Equity
A typical balance sheet contains three categories:
- Assets: whatever the company owns at a specific time. These include tangible assets (like property or machinery), liquid assets (like cash and Treasury bills), marketable securities (like stocks and bonds), inventory (raw materials), and intangible assets (like copyrights and patents).
- Liabilities: whatever the company owes at a given time to customers, suppliers, and financial institutions. Liabilities can also include rent, utility bills, taxes, wages, and dividends.
- Owner’s equity (aka shareholders’ equity): the remaining assets left for the owner(s) after all other liabilities have been settled. If a company’s assets were fully liquidated, this is the amount of money that would be returned to shareholders.
Though a balance sheet reveals the assets and liabilities for a given period, it typically does not include the company’s revenue, expenses, or cash outflow.
That’s why it’s vital to have all three types of financial statements on hand—both for internal and external usage.
Free resource: balance sheet template.
While a company’s financial statement contains these three documents (income statement, cash flow statement, and balance sheet) there are two more documents worth your attention.
4. Accounts Receivable/Accounts Payable
These two categories list any debts owed to your business as well as any debts your business owes to others.
Generally speaking, accounts receivable (AR) and accounts payable (AP) are often included within the balance sheet.
However, given their sizable impact on your business’s bottom line, we wanted to give them special attention.
Here’s another way to consider the two categories:
- Accounts receivable tracks outstanding payments owed to your company. As such, they are considered an asset on your balance sheet.
- Accounts payable represent any funds your business owes to customers, suppliers, and lenders. Therefore, they are considered a liability on your balance sheet.
As you know, outstanding debts are a reality that all business owners must confront.
Unfortunately, older debts are often ignored and sent to collection agencies, which directly undermines small business cash flow.
That’s where aging reports can help.
By tracking accounts receivable, your aging report reveals which customer invoices are missing (and how long they’ve been overdue).
Conversely, your aging report also shows you what bills your company needs to pay.
Note: accounts receivable and accounts payable are both listed within the balance sheet. As such, no standalone AR/AP templates are currently available.
5. Tax Returns
As an entrepreneur, your taxes cannot be overlooked.
While the filing process is complicated and time-consuming, it’s always worth the effort.
Here’s why: careful filing helps ensure that your business never overpays in taxes. Unfortunately, over 90% of entrepreneurs overpay on taxes each year.
While helping you save money, your tax return will also help your business chart the next year of operations. Whether you decide to develop new growth strategies or cut back on expenses, your tax returns will provide valuable (and irrefutable) information for your team to leverage.
Important: if you have any tax-related questions about your business, be sure to contact a CPA or tax professional. Though they will charge a fee, their guidance could help you avoid potential legal trouble and save significant sums of money.
Small Business Financial Statements Are the Key to Success
Small businesses are the backbone of America.
While it takes dedication to succeed, countless entrepreneurs have turned their small businesses into powerhouse corporations.
Whenever you get discouraged, just remember this: recent immigrants have launched over 55% of America’s billion-dollar startups.
Stick with the process, and the results will come.
By keeping your financial documents in order—and monitoring your income, cash flow, and balance sheets—you’ll be well on your way to small business success.
And to help you along the way, at uLink Business we’re dedicated to making international payments as seamless as possible.
Whether it’s to pay international services and providers, buy inventory, or process payroll, we’re here to support your business’ growth.
