Small Business Tips and Tools

5 Key Financial Documents That All SMBs Need

October 19, 2023
8 min read

You have the vision
You have the drive
You have the team.

As a small business owner, what else could you possibly need?

Just one more thing: streamlined financial reporting—the key to small business success. 

It may not be sexy, but sound financial organization is integral to any successful business. 

It reveals the financial health of your organization from top to bottom. It tells you how much cash you have, where it’s coming from, and where it’s going. It empowers you to make adjustments and reallocate funds from a position of strength. 

The best part is, you only need five key financial documents to unlock these answers (and more). 

Why Organized Finances Make Business Sense

Financial statements shine a light inside (and outside) your business. 

In other words, they reveal the financial health of your firm. 

Your income statement summarizes revenue, expenses, and profits. 

Your balance sheet shows your company’s position at a fixed point in time. 

Your cash flow statement illustrates how money moves through your business. 

While providing objective figures, financial statements do something even better: they deliver actionable insights to launch your business to new heights. 

As decision-making tools, they help you build budgets, satisfy tax compliance, and oversee accurate payroll. They promote fiscal discipline, reveal business trends, and analyze profitability.

But that’s only part of the picture.

While streamlining internal operations, financial statements also have serious external value. 

Looking to apply for funding, attract new investors, or eventually sell your business?

The following five documents will play a major role in each of those scenarios. 

5 Financial Documents for Entrepreneurial Success 

As an entrepreneur, you’re constantly evaluating the financial health of your business:

  • “How profitable are we?”
  • “Are we meeting our financial obligations?”
  • “What do we owe? And what are we owed?”

The answers to these questions could dictate your short and long-term success. Fortunately, you don’t need a crystal ball to get those answers.

You just need three financial statements to get started: the income statement, the cash flow statement, and the balance sheet. 

Taken in unison, these documents (plus a few more we will review below) can help you make informed financial decisions today, tomorrow, and for years to come. 

1. The Balance Sheet

Like a business x-ray, a balance sheet delivers a snapshot of your company’s financial position. While leveraging past data, a balance sheet is established firmly in the now.

Here’s what the balance sheet reveals: your company’s current assets, liabilities, and equity.

In fact, there’s a formula used to help you “balance” the proverbial sheet:

Business Assets = Liabilities + Owner’s Equity

As you would expect, a standard balance sheet reveals the components of those categories:

  • Assets, both existing and long-term assets.

    Existing assets include anything that can be liquidated within a calendar year, like inventory and accounts receivable (i.e., money owed to the company).

    Long-term assets typically include illiquid items, like company real estate and heavy machinery. These items are considered “capital” assets with long-term value.

    Intangible assets—like patents and trademarks—are also factored in here.
  • Liabilities, including current and long-term debt obligations.

    Current liabilities include items that must be paid in the near term, such as staff salaries, short-term loans, and accounts payable (i.e., utility bills and raw material costs).

    Long-term debt typically includes any obligations that aren’t due within a year, such as mortgages, bonds, or long-term loans.
  • Owner’s Equity, or the company’s net worth.

    In other words, owner’s equity—or “shareholders’ equity”—is the hypothetical amount of money provided to shareholders if all company debts were paid and all assets were liquidated.  

Above all, a balance sheet provides a summary of your business at a specific moment in time.
To that end, it has both internal and external value.

Internally, it helps your business make adjustments and course-correct for a brighter future.

Externally, it shows investors what resources are available as they project the future performance of your firm.

Note: Download a free balance sheet template.

2. The Income Statement

Need to determine the “bottom line” of your business?

An income statement can help you do that—and much more. 

In fact, it can be used to evaluate profitability and identify revenue and expenses. That’s why an income statement is often called a profit and loss (P&L) statement

While a balance sheet summarizes your business at a given moment, an income statement reveals business performance during a particular reporting period

You can track profitability in four steps:

  • Step 1: Add up the total revenue your business generates.
  • Step 2: Subtract the “cost of goods sold” (i.e. materials and labor) from your total revenue. This will provide your gross profit, an integral measure of your business’s profitability.
  • Step 3: Deduct your operating expenses (i.e. rent and utilities) from your gross profit. This will provide your operating profit.
  • Step 4: Deduct interest, tax, and other expenses (i.e. legal fees) from your operating profit. This will determine your net profit, or the total profit (or loss) your business earned over a given period. 

For example, let’s say Maria runs a local farmer’s market. In June, she sold $10,000 worth of fruits and vegetables. That’s her total revenue.

Customers love her products, which she sources from organic farmers at $3,000 a month. 

If we deduct the cost of goods sold (the fruits and vegetables) from the total revenue, we see that Maria has a gross profit of $7,000. 

At the same time, she pays $1,000 a month in storefront rent, $2,500 a month in employee wages, and $500 in utility bills. 

Therefore, Maria’s total operating expenses are $4,000 a month. 

When we deduct that number from her gross profit ($7,000 minus $4,000), we see that Maria 

earns $3,000 in operating profit. After factoring in taxes and other miscellaneous costs, Maria can then determine her net profit.  

As you can see, an income statement is a simple and powerful tool to determine profitability. 

As with your balance sheet, it has internal and external value. 

Indeed, while your income statement can help streamline business operations, it will also help investors get familiar with your firm.

Note: Download a free income statement template

3. The Cash Flow Statement

As a measure of liquidity, your cash flow statement reveals your firm’s ability to fulfill its financial obligations. 

Though profit and cash flow sound similar, every entrepreneur knows full well that they’re not. After all, countless businesses have enjoyed parabolic profits while parched for cash. 

It’s one of the many enigmas of the business world, and something most consumers don’t understand. 

Nevertheless, a cash flow statement reveals two important facts: where your business is generating money and where your business is spending it.

By tracking cash inflows (and outflows) every single day, your cash flow statement empowers you to confidently forecast revenue, project expenses, and build budgets.

Generally speaking, a cash flow statement has three pillars.

First, Operating Activities, or the money earned from your net profits (or losses).

Second, Investment Activities, or the money earned from the sale of long-term assets (i.e. real estate or stocks).

And third, Financing Activities, or the money earned from loans, credit products, and capital investments (i.e. funding from a private equity firm).

For example, Amir runs a popular coffee shop with $10,000 in available cash. 

That’s his opening balance. 

Despite inflation, business has been booming, and Amir banked $15,000 in operating activities alone. 

On top of that, he has earned another $3,000 from his money market account (i.e., his investment activities), while leveraging $5,000 in financing activities from an investment bank. 

In total, Amir’s cash flow statement would reveal $33,000 in available resources, over three times his operating expenses.  

Since Amir is cash-flow positive, he can then decide whether he wants to put the money right back into the business, invest it in the stock market, or take a well-deserved vacation. 

Note: download a free cash flow statement template

4.  Accounts Receivable and Accounts Payable

In most cases, accounts receivable and accounts payable are featured within a balance sheet. 

However, given their importance (and their impact on your bottom line), we wanted to spotlight them here. 

In simple terms, these categories reveal any debts owed to your business alongside any debts your business has yet to pay. 

As such, accounts receivable are considered an asset on your balance sheet, while accounts payable are considered a liability

As all business owners understand, it’s very important to track down any outstanding debts owed to your business. Sadly, older debts are repeatedly ignored until they’re relegated to various collection agencies. 

As a result of such delinquency, businesses lose cash flow that could be leveraged in many valuable ways. 

Here’s the good news: aging reports are built to help you manage your accounts receivable and stay on top of any overdue payments. 

More specifically, they’ll help track who owes you payment, how much they owe, and finally, how long they’re overdue. 

Again, accounts receivable and accounts payable are both a part of your balance sheet and a cornerstone of your solvency. 

5. Tax Returns 

Though time-consuming and complicated, taxes are an essential part of every small business. 

On the one hand, dedication to careful filing will keep you on good terms with the IRS. That’s very important, especially as they ramp up hiring and spending to increase tax enforcement.

Beyond your legal standing, careful filing also protects your business from overpaying. Believe it or not, over 90% of entrepreneurs overpay on their taxes every single year. 

Finally, your tax return serves as an objective review of your business’s financial health. Whether you decide to reduce expenses or expand operations, your tax returns can provide valuable insights for your team to use.

As always, don’t hesitate to contact a tax professional if you have any questions about your business. Their guidance can help you save money, reduce stress, and avoid legal trouble. 

The Hazards of Haphazard Record Keeping

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.

We don’t reference these statistics as a scare tactic. Instead, we want to highlight the vital importance of financial organization. 

Though SMB attrition can have myriad causes, haphazard record keeping is almost always at play. 

Even major companies are undone by careless bookkeeping mistakes. 

Just look at the meteoric demise of FTX, a crypto empire worth $32 billion brought down by an “unprecedented lack of documentation” (among other issues…). Amid the corporate carnival, FTX managers were regularly approving eight-figure expense reports with emojis

True story.

Nevertheless, this disturbing scenario reveals two key insights for all entrepreneurs:

  • Nobody is “too big to fail.”
  • The road to business failure is paved with bad bookkeeping. 

Yes, overseeing your financial statements requires some patience, humility, and a little TLC. 

But make no mistake, an ongoing investment in your financial reporting will protect your company (and your team) for the long-haul. 

Chaos to Clarity: The Key to Better Bookkeeping

Back in the day, business owners managed finances with ink and quill. They wrote on scratchy parchment lit by candlelight. 

Thank goodness for modern technology. 

Today, bookkeeping has gone digital, and it’s faster and more affordable than ever. 

While we provided some resources for downloadable income statements, balance sheets, and cash flow statements, we highly recommend using software that manages these documents on your behalf.

Here are just a few of the accounting tools our community loves:

  • Float, which helps you visualize and plan your future cash flows for years at a time.
  • Xero, which provides end-to-end bookkeeping solutions (while making it “less boring”).
  • QuickBooks, the popular software that helps with accounting, payroll, and much more.

Whichever software you choose, you’ll be glad you went digital. 

As you populate your software with your financial information, it will quickly deliver actionable insights and data to strengthen your team.  

Plus, you’ll never have to worry about where you put your papers. Or whether you have enough parchment. 

Hello Alice: Where Small Business Owners Thrive

We’ve talked a lot about business finances today. 

Now let’s talk about you…

In our opinion, entrepreneurs like you share three fundamental traits:

#1: You’re a visionary. You imagined a better future, and you made it a reality. 

#2: You’re a leader. Your dream was contagious, and your team trusts you.

#3: You’re meticulous. You dot every ‘i’ and cross every ‘t’ because you know the details matter.

The financial documents we covered today may be a little tedious, but in our experience, they’re worth every second invested in them. 

Whether you hire an accountant or manage the bookkeeping yourself, we’re confident the rewards will be well worth the effort. 

At Hello Alice, we recognize your commitment to excellence—and we’re here to support you every step of the way. 

While powering your path to profits, we’re equally dedicated to delivering educational tips, advice, and opportunities to you and your team.

With Hello Alice, you’ll join the world’s most connected community of healthy and growing businesses. Throughout your journey, you’ll gain the support you need to find your way, to discover your potential, and to accelerate your future. 

Wonderland awaits. Jump in today.

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