3 Most Important Types of Financial Statements Your Business Needs

It’s a question that most of us have been asked at a dinner party at some point in our lives: “If you were in a plane crash and stranded on a desert island, what one _____ would you want with you?”

In 2005, The Office did an episode titled “The Fire” in which a small fire in the kitchen forces the staff out into the parking lot while they wait for help to arrive. At some point, the classic “desert island” scenario comes up. Dwight and Jim have the following conversation:

Dwight Schrute: Question: is there firewood on the island?
Jim Halpert: I guess.
Dwight Schrute: Then I would bring an ax, no books.
Jim Halpert: No, it has to be a book, Dwight.
Dwight Schrute: Fine. “Physician’s Desk Reference.”
Jim Halpert: Nice. Smart.
Dwight Schrute: Hollowed out. Inside, waterproof matches, iodine tablets, beet seeds, protein bars, NASA blanket, and, in case I get bored, “Harry Potter and the Sorcerer’s Stone.” No, “Harry Potter and the Prisoner of Azkaban.” Question: did my shoes come off in the plane crash?

Sometimes people want to know what one album you would want to be able to listen to on the island. In the most recent copy of Reader’s Digest, one of the funny tweets they highlighted said…

But since this is a business blog, not a dinner party, let’s ask the question another way.

Question: If your business was stranded on a desert island, what types of financial statements would you want?

You deal with all kinds of reports in the course of running your business. And let’s face it, a lot of them can just be confusing and overwhelming. So if you were limited to only 3 reports but still needed to effectively run your company, which ones would be essential?

In our line of work as CPAs and business advisors, we’ve helped a lot of businesses with a lot of reports. So here are the top 3 types of financial statements that we’d recommend before you head off to your island.

3 Types of Financial Statements Your Business Has to Have

1. Monthly Income Statement

Also known as a “Profit and Loss Statement” or “P&L”, this is a short report that gives you a picture of your revenue, expenses, and profits for a specific point in time.

This report can be generated daily, weekly, monthly, or yearly…however often you like. But we recommend that you take a look at your P&Ls once a month. More frequently than that is too often, and any longer leaves too much time in between. If you take your eye off the ball for too long, lots of things can go wrong. Monthly seems to be just right.

A Weekly P&L might seem like a good idea. But since the ebb and flow of your business probably varies quite a bit from week to week, you might have a hard time getting an accurate picture of your finances. Also, a Weekly Income Statement just adds one more thing to your to-do list each week.

Your time is better spent growing your business, not just reading about it.

By generating this report on a monthly basis, you can easily compare what’s going on in your finances right now to what happened in other months. You can quickly see if your company is improving or if there are negative trends that you need to address.

What does a P&L show?

Entrepreneur.com defines a Monthly Income Statement (or P&L) as “a simple and straightforward report on a business’ cash-generating ability.” The article goes into greater detail (as we will in upcoming blog posts), and is worth reading to get a good overview. It does a good job of listing all of the possible components of a good P&L Statement:

  • Income
  • Cost of Goods
  • Gross Profit Margin
  • Operating Expenses
  • Total Expenses
  • Net Profit
  • Depreciation
  • Earnings Before Interest and Taxes
  • Interest
  • Taxes
  • Net Profit After Taxes

You can quickly see how knowing these things can give you a valuable snapshot of your business’ finances.

2. Monthly Balance Sheet

A Balance Sheet is helpful in communicating the current “book value” of your business to lenders, investors, or people with an interest in your business. It is set up as a formula with 3 categories that looks like this:

Assets = Liabilities + Shareholders’ Equity

“Assets” are anything of value that your company owns that could be liquidated and turned into cash. That could be land, equipment, inventory, raw materials, etc.

“Liabilities” refers to money you owe to someone else. Payroll, rent, outstanding debts, and taxes are all examples of this.

“Shareholders’ Equity” is the net worth of a company if all of its assets were sold and liabilities reconciled.

As the name implies, a Balance Sheet must always balance. For more information on what goes into preparing one, take a look at this article from Harvard Business Review on “How to Prepare a Balance Sheet: 5 Steps for Beginners.”

3. Cash Flow Report

This report serves the purpose of showing you how much cash is coming into and out of your business at any point in time.

It lets you know at a glance where your cash is coming from and where it is going. It shows you the cash activity from operating activities, investing activities, and financing activities.

Sometimes a Cash Flow Report can come out with a negative amount. While this can certainly be concerning to a business owner, it doesn’t automatically indicate trouble. A company could experience negative cash flow in a particular month following a period of intense expansion in which you decided to purchase a lot of expensive new equipment, for example. That’s why it’s important to regularly look at this report (along with the others) to get an accurate idea of your financial position.

This article on understanding the cash flow statement from Investopedia is a good resource if you want to go deeper.

One More Solution to Consider

The next time you find yourself stranded on a desert island reading over your 3 essential types of financial statements, we’ve got a way that you can get rescued and get back to civilization.

Tell the CPA who is sending you those reports to send a boat!

CRS CPAs has been helping businesses like yours navigate all kinds of situations for over 40 years. These 3 main statements are part of the Small Business Bookkeeping Services we provide to hundreds of clients on a regular basis, so we can easily help you with these and more. And with 6 different locations across Tennessee (and the ability to work remotely with any company anywhere in the nation), we’ve got plenty of accounting and business experts ready to tackle whatever you face.

Reach out to our team and schedule a call. So far, we haven’t had to do any island rescues…but we’ll be glad to if that’s what you need!

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Jul 7, 2021
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