How to Use Balance and Income Statements for Your Business

Illustration of a person holding a briefcase while stepping through a door that represents a financial statement and what they unlock for your business

A financial statement is an official document that details your business’ money- and capital-related activities—a formal record to summarize all sorts of money-related data.

There are many different kinds of financial statements for different contexts and uses. The person responsible for putting a financial statement together depends on the situation. Sometimes you, the business owner, have to prepare financial statements. In other cases it may be your accountant, bookkeeper, account manager, or even an auditor.

There are lots of uses for financial statements. Below, we’ll dive into why you need them and how to prepare financial statements for your ecommerce business.

Benefits of financial statements

Financial statements are beneficial in small business accounting for a number of reasons, the largest one being they provide a big picture view of your business’ financial health. Financial statements make it easier to understand the data and get an idea of where you stand financially. You can use financial statements to determine if you have enough money to reinvest or grow your business, as well as pay yourself and your other accounts payable. Knowing your business’ finances also helps with cash flow management.

The benefits and use cases of financial statements also expand beyond the obvious. Financial statements can also help you to:

  • Secure investors. If you need funds from investors or want to raise capital through crowdfunding, financial statements can prove your business is worth investing in.
  • Get loans. When applying for small business loans and funding, potential lenders will also want to review your financial statements to assess the likelihood of being paid back. You can look for funding through Shopify Capital and government relief programs for small businesses affected by COVID-19.
  • Deal with audits. Your local tax agency could audit your business at any time, and financial statements will help you weather those storms more smoothly.
  • Value your business. You might want to sell your business on Shopify Exchange or elsewhere. Financial statements help you value your business so you can establish a fair price.
  • Plan better. When you regularly prepare financial statements, you have more data to see trends. You can use historical data to forecast, and these projections will be more accurate because they’re based on actual data.

Your financial statements also inform annual reports. Annual reports are financial and operational summaries for each year a company operates. They’re comprehensive reports that are distributed to shareholders so they can get an in-depth understanding of your business. We publish Shopify annual reports for investors and the general public to see, along with a few other financial statements.

Shopify financial statements reports.png

Types of financial statements

There are lots of different types of financial statements, but the three most important and commonly used are:

  1. Income statement
  2. Balance sheet
  3. Cash flow statement

Income statement

Your business’s income statement—also referred to as an earnings statement or profit and loss statement—calculates revenue minus expenses to tell you how much money your business is earning. Income statements are also prepared on a regular basis, perhaps monthly, quarterly, or even annually.

Here’s an example of what a small business income statement might look like:

income statement example.png

The income statement is the first financial document to prepare. This is because you need the calculations from the income statement to plug into your balance sheet and cash flow statement. Without the information from the income statement, your balance sheet and cash flow statement will be incomplete.

Balance sheet

The balance sheet lists your business’s assets, liabilities, and shareholder equity. Balance sheets are typically prepared monthly or quarterly and serve as a quick glance at how much your business is worth after all liabilities or debts and shareholder payouts have been accounted for.

Here’s an example of what a small business balance sheet might look like:

balance sheet example.png

Generally speaking, you want your balance sheet to reflect a positive, not a negative, number. This figure is representative of your business’ worth. You can also track this number over time to see how you’re growing or losing money.

Cash flow statement

Cash flow refers to how much money is coming into your business and how much money is going out of your business—your revenues and expenses, essentially. So your cash flow statement is a record of exactly that: a summary of your cash inflow and cash outflow for a period of time.

You can use the Shopify cash flow calculator to plug in your numbers and get a cash flow statement for your ecommerce business. You can do this on a regular basis to project your cash flow in the future. Here’s an example of what that cash flow statement will look like:

Shopify cash flow calculator.png

How to prepare financial statements for your business

Although it can seem overwhelming, preparing financial statements is a key part of running any business. This helps you know you’re on the right track, able to cover expenses, and still bringing in a profit.

We’ve put together a quick four-step guide for gathering your numbers and putting together a financial statement—with a template included.

1. Use the right money-tracking tools

The first step is to find the right tools for keeping track of your business expenses and sales. While Shopify can help you track all incoming orders so you know what your business is bringing in, you may want to invest in a tool like QuickBooks or HoneyBook to start monitoring any business expenses. 

A screenshot of the Quickbooks homepage

This way, you can easily monitor expenditures, see salaries going out, and make sure your business stays afloat. Plus, it makes it easy to pull the numbers you need for financial statements.

2. Pick a reporting period

You may want to build a financial statement for the last week, month, or even year. Start by choosing your reporting period so that you can gather data from the right time period.

A person writes on a notepad while typing on a laptop computer

In your money-tracking tool and in your Shopify dashboard, you will be able to select your reporting period and export your data to start preparing your financial statements.

3. Gather your data

A red pen sits on a document with a bar chart and a row of numbers

Before you put together your financial statements, you need to gather and verify your data. This typically involves some sort of account reconciliation. Account reconciliation is when you check that your financial data matches what is reflected in your actual financial account.

4. Put together your report

Once you’ve completed your data validation, you can use our financial worksheet template and plug in your numbers to get started with your own financial statements.

Screenshot of Shopify's financial worksheet spreadsheet template

You can also prepare financial statements in the Shopify dashboard. Navigate to your finances reports to see your finances summary page as well as reports for sales finance, payments finance, liabilities, gift cards, and total sales. You can also pull profit reports broken down by product, SKU, and POS location.

If you want to export a report for easy saving and sharing in Microsoft Excel or Google Sheets, you can do that directly from the report view. Simply open the report and click Export. You may have to specify which report and data you want to export for some of the finances reports.

Are financial statements worth the effort?

Financial statements may be complex, but there are many ways you can use Shopify and a suite of small business accounting tools and apps to simplify the process. When you prepare your financial statements on a regular basis, you can spot trends, maintain positive cash flow, and set yourself up for an endless amount of growth opportunities.

Financial statements FAQs

Why is a financial statement important?

A financial statement is important because it helps you track and understand your business’ financial health. Financial statements are also important for securing external funding, dealing with audits, and organizing taxes.

Can a bookkeeper prepare financial statements?

Yes, a bookkeeper can prepare financial statements. You can also prepare them yourself or use a CPA. Sometimes auditors prepare financial statements as well.

What are the four basic financial statements?

The four basic financial statements are:
  1. Balance sheet
  2. Income statement
  3. Cash flow statement
  4. Shareholders’ equity statement

Which financial statement is prepared first?

The income statement is prepared first. You prepare the income statement first because it contains information that you need to be able to prepare the other financial statements. Without the information from the income statement, you won’t be able to prepare your balance sheet or cash flow statement.

Which financial statement reports revenues and expenses?

The cash flow statement reports revenues and expenses—cash inflows and outflows.

Where is inventory reported in the financial statements?

Inventory is considered an asset, so it’s listed on your balance sheet.

Where do you find net income on financial statements?

Net income is on your income statement. The resulting metric of your income statement represents your net income.

Where do you find net sales on financial statements?

Your net sales are listed at the top of your income statement under the revenue section.

Where do you find total debt on financial statements?

Total debt is a liability, so you’ll find this on your balance sheet, under current and long-term liabilities.