If you’re running your own business and aiming for serious growth in the next few years, you’ll need to keep tabs on how your business is doing financially – and we mean really keep tabs. You can’t hit a target if you’re shooting in the dark!
The best way to do this is by creating financial statements, so you can analyse the current financial health of your business. A good set of statements can help you plan for the future, by giving you a clear picture of where you are today.
But hang on – what exactly is a financial statement?
Great question! Basically, a financial statement is a formal document that shows you the financial health of your business at a specific point in time, or over a certain period. It’s a snapshot of your money situation – where it’s coming from, where it’s going, and what you’ve currently got on hand.
There are three main types of financial statements to be across:
- A profit and loss statement
- A cash flow statement
- A balance sheet
Each one gives you different insights into your business’ performance, and all three together should give you a full financial picture.
Profit and Loss Statement: The bottom line report
A Profit and Loss Statement (or P&L for short) shows whether you’re making money or losing it over a specific period.
To create one, you’ll need to add up all the money coming in, subtract all your costs, and see what’s left. If there’s money left over, congratulations – you made a profit! If you’re in the red, it might be time to rethink your business strategy.
What makes a P&L so useful?
It’s not just about knowing if you’re profitable (though that’s pretty important!). A good P&L breaks down exactly where your money is going, so you can spot opportunities to improve.
For example, if you use your P&L to work out that 15% of your income is going to one particular supplier, maybe it’s time to shop around for better deals. Or if your advertising budget is tiny but your profit margins are healthy, perhaps it’s time to invest more in getting the word out.
The numbers really do tell a story – you just need to know how to listen to them. And trust us, once you start paying attention to your P&L, you’ll wonder how you ever ran your business without it!
📖 We have, you guessed it, a separate guide to profit and loss statements. Tada!
Cash Flow Statement: Tracking the flow of money through your business
A cash flow statement is a record of the money flowing in and out of your business over a specific period of time. Unlike a balance sheet which is a snapshot of your current financial position, your cash flow statement shows you exactly when you’ve been making money, and when you’ve been spending it.
Did you have a great sales month but then get hit with a bunch of bills? Your cash flow statement will show exactly what happened and when.
What’s the point of a cash flow statement?
Simple – it helps you understand whether you’ve had cash on hand when you needed it. If you haven’t, what can you do to make sure you’re always prepared for crunch time in the future?
How do you track cash flow?
You don’t need fancy software (though it’s nice if you’ve got it). You can use:
- A simple calendar where you record income and expenses as they occur
- A basic spreadsheet tracking money in and money out
The formula is beautifully simple: Money in minus money out = your net cash flow. Positive number? You’re in the green! Negative? Time to chase some invoices or postpone that tech upgrade.
📖 For more on cash flow and why it’s so important to your business, check out our full guide to cash flow for sole trader businesses. It’s well worth a read!
Balance Sheet: What you own vs what you owe
A balance sheet is… well, it’s a sheet that balances!
But seriously, it’s basically a simple list of everything your business owns (assets) versus everything it owes (liabilities).
It’s all about your financial position at this exact moment in time. How much cash do you have in the bank? What equipment do you own, and what is it worth? How much do you owe suppliers?
Once you calculate all that, you’ll be left with a single number: Your business’ Net Assets (or Net Worth). If it’s positive, you own more than you owe. If it’s negative, you currently owe more than you own, and you might need to do something about that (depending on your situation – it’s not always a bad thing!)
What goes on a balance sheet?
Assets (the stuff your business owns):
This includes things like:
- Cash
- Inventory
- Equipment
- Vehicles
Liabilities (what your business owes):
We’re talking about:
- Credit card debt
- Supplier bills
- Loans
Once you’ve listed out the values of all these different categories, you’ll need to subtract your business’ total liabilities from total assets. What’s left is your business’ net worth – essentially how much your business is actually worth on paper.
Having an up-to-date balance sheet is a quick way to see if you can afford that shiny new piece of kit you’ve been eying. Or whether you should settle a few bills before focusing on anything else.
📖 We get more into the weeds in our explainer on balance sheets. If you’re looking for a step-by-step breakdown of how to create one, this is it!
Financial statements sorted.
So there you have it – the three financial statements that every business owner should know about. Each one tells you something different about your business:
- Balance sheet: Your financial position right now (what you own vs what you owe)
- Cash flow statement: How money moves in and out over time
- Profit and loss statement: Whether you’re actually making money
The good news? You don’t need to be an accountant to create these. Start simple with spreadsheets or even a calendar, and work your way up to fancier tools as your business grows.
Here’s the thing though – keeping track of all this financial stuff can get pretty overwhelming, especially when you’re trying to focus on actually running your business.
Speaking of focusing on your business, we can help with that.
Hnry does your taxes
Hi! We’re Hnry – Australia’s largest accounting service for sole traders.
By that, we mean we’re an award-winning app that’s helping sole traders of every industry spend less time on financial admin, and more time doing what they love (unless what they love is financial admin).
For just 1% +GST of your self-employed income, capped at $1,500 +GST a year, Hnry will calculate and pay all your taxes, levies and whatnot for you, including:
We also complete and lodge your tax return for you, including claiming any tax relief you might be entitled to. It’s all part of the service!
More importantly, we free up thousands of hours for you to focus more on what you do best – running your business. Hnry is on a mission to make being a sole trader simple, affordable, and accessible for everyone.
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