If you’re seeking low cost funds to grow your business, lenders will ask for a number of financial documents to assess the overall health of your company.
Two documents business owners are frequently asked to produce is an up-to-date balance sheet along with an income statement. Although they seem similar, each document reveals different information to lenders about your business. Here is information about each and why you need to have both on hand when approaching a lender.
According to the SBA, this statement provides an overall financial snapshot of your small business. As an equation, it looks like:
[ASSETS = LIABILITIES + NET WORTH]
Also known as a “Profit and Loss Statement,” this document measures a company's financial performance over a specific period of time and includes all revenue and expenses.
An income statement shows lenders a company’s ability to generate profit by increasing revenue, reducing costs or both.
For in-depth information about calculating this financial document, review this post on the SmartBiz Small Business Blog: How To Prepare An Income Statement.
The differences between the balance sheet and income statement are outlined below:
The balance sheet shows if a business is over-leveraged and can handle additional credit. It can also help potential investors and current shareholders see how much value your company currently has. That’s because a balance sheet shows the assets that your company currently owns and the liabilities that reduce its profits.
The income statement is used to decide whether a business is generating a sufficient profit to pay off liabilities. You can also use it internally to determine whether your company is meeting its financial forecasts for a designated time period and what it means if you’re way off course. Income statements are additionally helpful for identifying areas in which you’re spending too much and planning how to scale back on those fronts.
According to Investopedia, the importance of these two reports varies. However, the general view is that the balance sheet is second in importance to the income statement, because the income statement reports the results of the enterprise. Additionally, since lenders and investors are more interested in income statements than balance sheets, income statements may be more important since you can use them to fuel growth.
That said, in certain situations, a balance sheet may be more important. For example, if you want to determine your company’s assets at a specific point in time ahead of a certain purchase, balance statements are more useful. You’ll also have an easier time calculating your debt to equity ratio with a balance sheet.
Although balance sheets and income statements mostly serve different purposes, they overlap in small ways. For starters, they’re each considered one of the three major financial statements (the third is the cash flow statement ). Additionally, you’ll probably want to have both on hand when applying for loans, speaking with investors, or conducting internal reviews.
To prepare an income statement, take the following steps:
An income statement that follows the above steps might look like this:
Your Business Name
Income Statement for Q1 2021
To prepare a balance sheet, take the following steps:
If you follow the above steps, your balance sheet should appear as follows:
Your Business Name
Balance Sheet
It’s important to have a firm grasp on both of these financial statements when you begin the loan application process. Look to your accountant or another financial professional to help pull together the numbers if you need help in this area. Be sure to have both of these documents up-to-date so you can easily upload and share with lenders.