More often than not, the terms 'Financial Statements' and 'P&L' get thrown around capriciously by finance professionals with the assumption that everyone knows what they're talking about. As a business owner, if you don't know how to define these terms, it's OK! After reading this post, you will have a clearer idea of what they mean.
Financial statements are the formal records kept by a business, person or entity. These records will include information such as assets, liabilities, equity, revenue, expenses, losses & gains, and are most commonly viewed by company management, investors, creditors or bankers. Other parties who might view a company's financial statements include customers, competitors, government agencies and labor unions. When someone asks for a copy of your financial statements, it is typically in reference to one or all 3 of the main financial statements...
- Balance Sheet
- Income Statement aka P&L
- Statement of Cash Flows
The balance sheet is a snapshot used to provide a company's financial position on a specific date. If a company presents a balance sheet as of February 26th, 2016, it means that all of the amounts recorded reflect transactions through that date in time. Amounts may or may not change the following days, weeks or months based on the company's recorded activity. The balance sheet is used to summarize...
- WHAT the company owes (as of a specific date)
- WHO the company owes (as of a specific date)
INCOME STATEMENT aka P&L
The income statement, most commonly known to some as the P&L, or Profit & Loss, reports the revenues, expenses, gains and losses occurring during a certain period of time (i.e. January 1st, 2016 - December 31st, 2016). The income statement is important because it shows the profitability of a company during the specified period of time. What the income statement DOES NOT show are cash receipts (money received) nor cash disbursements (money paid out). The income statement is typically used to determine a company's profitability for lenders, investors and creditors.
STATEMENT OF CASH FLOWS
The statement of cash flows is a document that summarizes how much cash a company is holding during the same period of time as the company's income statement. The statement of cash flows and income statement will typically work hand in hand together. Cash flows can be defined as money received and money paid out by a company. There are three sections within the statement of cash flows...
- Cash flow from operating activities
- Cash flow from investing activities
- Cash flow from financing activities
Lenders, investors & creditors will use this statement to determine that cash is properly flowing in and out of of a company in a healthy manner.
Though the financial statements discussed above represent the 3 most commonly used, the statement of retained earnings and statement of stockholder's equity may occasionally be referenced depending on the company's entity type. If these two statements are used, it will specifically for companies or businesses formed as corporations.
Want more? Check out 9 Steps To Elevate Your Business Finances, if you haven't already!