What is the difference between a balance sheet and an income statement for a small business?

In layman terms, Income statement tells about the income and expenses Balance sheets tells about assets and liabilities One tells how much have you earned or lost and other one tells how much you have or pay back

A balance sheet is a snapshot in time, or a picture, of your organization’s assets and liabilities. The assets will have a benefit to you in the future. Think cash, receivables, and equipment. The liabilities represent an obligation that is owed in the future. Think payables, accrued liabilities, unearned revenue, and long term debt. When assets exceed liabilities, the difference represents the accounting “equity” in the business. This is different than “equity” as discussed on TV shows like Shark Tank. If liabilities exceed assets, then the organization has insufficient assets to satisfy its liabilities and is in trouble.

While the balance sheet represents a picture at a point in time of your company’s finances, the income statement is like a movie showing revenue and expenses over a period of time. The income statement is often looked at using ratio analysis. Gross Margin: (Revenue - Cost of Goods Sold) ÷ Revenue This ratio tells you how much money you made before paying any operating expenses of the company. Profit Margin: Net Income ÷ Revenue This ratio tells you how much the company keeps of revenue after paying all expenses. Return on Equity: Net Income ÷ Weighted Average Equity This ratio tells you how much of a return owners as a whole earned from owning the company.

Ratio analysis allows you to see how your company is doing against various benchmarks. If you are operating a taco truck, you can compare your ratios against other ratios for similar food truck businesses. Your trusted business advisors (accountants, bankers, etc.) should be able to help identify industry reports you can use. The key is to understand WHY you may differ from the benchmarks, whether because your differences are positive or negative.

The balance sheet and income statement are critically important. However, the statement of cash flows is perhaps the most important financial statement. Like an income statement, it is a movie over a period of time. It reflects cash inflows and outflows. You can have an extremely profitable company, but if cash outflows outpace cash inflows, it is not sustainable and can lead to the demise of the organization. This is why many companies negotiate when payables are due (payables at 30, 60, or even 120 days), spend time doing credit checks on customers, and focus on collecting as soon as possible.