Understanding and Using Financial Statements for Your Business

Understanding, creating, and using financial statements can help you make informed and strategic decisions about how to run and grow your business.

Unfortunately, financial statements inspire fear and anxiety for some entrepreneurs.

Entrepreneurs typically have many skills, but finance and bookkeeping are not always among them. Most lenders, however, will want to see financial statements before making a loan. And basic financial statements are not just a hurdle to jump over to get a loan. They are tools to help you understand your business.

While you don’t need to become an accountant, increasing your comfort and understanding of basic financial statements can be very helpful. Below we explain the three most important financial statements:

• Profit and Loss
• Balance Sheet
• Cash Flow

Taken together, these three interrelated financial statements can give you powerful insights into your business’ profitability, its financial condition, and expected cash flow. Let’s take a high-level look at each one.

CRAFT3 PRO TIP

Don’t worry if you don’t understand everything about basic financial statements on your first read through. Take in what you can and feel free to skip parts that are confusing. Come back later and give the section a second read.

-Aldo Medina Martinez VP, Commercial Lending Team Manager

1. Profit and Loss (also known as an Income Statement) 

Generally created monthly, after bank reconciliation, a profit and loss statement lets you track revenue, monitor expenses, and know whether your business is profitable.

You can think of a profit and loss statement as two simple formulas.

Revenue - Cost of goods sold = Gross profit

Gross profit - Expenses = Net profit

Revenue can come from goods sold or services provided. Your cost of goods sold are your costs directly related to the product or service you sell. Your expenses are other, indirect costs not associated with goods sold or services provided, such as rent. 

Your gross profit shows you the money available to pay operating expenses such as rent and payroll.
 
Your net profit shows you money available to reinvest in your business, pay taxes, or pay yourself.

2. Balance Sheet

A balance sheet is a moment in time snapshot of your business’ finances. Generally created quarterly, it lists your assets and liabilities.

You can think of a balance sheet as a simple formula.

Current assets + fixed assets - liabilities = net value or equity

Current assets include accounts receivable, inventory, and cash, while fixed assets are less liquid and include furniture, equipment, and property. 

Liabilities are often broken down into those due within 12 months and longer-term liabilities such as loans and mortgages.

3. Cash Flow 

A cash flow statement is future-oriented and models the expected cash flowing in and out of the business. This can help you set sales and expense goals, plan for major expenses, and cope with seasonal fluctuations in sales.

Again, there’s a simple formula.

Cash receipts (inflows) - cash disbursements (outflows) = cash surplus or shortfall

Cash receipts typically come from goods sold or services provided, while cash disbursements are your expenses.

Cash flow statements, by highlighting potential shortfalls as well as inflows, can help you determine your need for financing as well as your ability to repay a loan.

CRAFT3 PRO TIP

It’s OK if you’re not able to produce financial statements that are up to an accountants’ standards. Gaining new skills takes time. Partial financial statements are better than none at all. And if you end up working with a bookkeeper or other professional, understanding the main concepts behind key financial statements is very helpful.

-Stephanie Lachman VP, Business Lender

Bonus: You Don’t Have to Be a Financial Expert

Getting comfortable with financial statements takes time—and that’s okay. You don’t have to be an accountant to understand the basics or to take meaningful steps toward loan readiness.

Even starting small—like organizing your income and expenses—is a step in the right direction.

• Connect with your local SBDC (Small Business Development Center)
• Find a mentor through SCORE, or use SCORE’s Financial Statements Template Library
• Use the guide Financial statements: What business owners should know from Intuit QuickBooks

You’ve got this—one step at a time.

When You’re Ready, We’re Here to Help

At Craft3, we specialize in working with entrepreneurs who may not fit the traditional mold — and we believe in second chances and fresh starts.

Take the Next Step

• Explore Craft3’s Business Loan Options Learn how we support small business owners through accessible, flexible financing.

• Submit a Loan Inquiry You can start the loan process by completing our online form. A lender will then follow up with you to schedule a conversation.