Running a small business can be exhilarating. But it can also be overwhelming.
From managing employees and serving customers to handling day-to-day operations, it’s no surprise that SMB owners may overlook the financial paperwork side of things.
But having your financial documents in order isn’t just necessary for tax season. They also serve as an ongoing foundational pillar for your SMB’s long-term stability and growth.
Indeed, financial documents are powerful tools that simplify your SMB finances—helping you improve cash flow and plan more strategically.
Below, we explore the most important financial documents to your SMB management, breaking down the elements of each one, and how to interpret their results.
The Importance of Financial Documents for SMBs
Regardless of how you feel about paperwork, prioritizing SMB financial management is critical to your business’s ability to not only survive in the short term, but thrive in the longer term.
Understandably, dealing with financial documents can feel overwhelming, even intimidating.
After all, only about half of small business owners consider themselves financially literate. But the good news is, you don’t have to be a financial expert to create, use, or interpret key financial documents.
First off, think of these documents as your business’s health check. They reveal trends in revenue, profitability, and expenses, helping you identify growth opportunities and prevent potential cash flow issues.
Well-managed financial records also help build trust and credibility with lenders, investors, and even suppliers. For example, before approving financing, many funders will want to know whether your SMB is stable enough to make repayments.
Finally, legal and tax compliance also depend on accurate financial records. Failing to track your SMB finances properly can result in audits, hefty penalties, and even costly legal issues. By prioritizing your financial documentation, you can help ensure your small business remains compliant while also minimizing financial risks.
Key Financial Documents
Financial documents may seem daunting, but they’re key to maintaining control over your business.
The three types below are of utmost importance to your small business, providing valuable insights to help you manage your SMB finances with confidence.
Balance Sheet
Sometimes referred to as a “statement of financial position” or “statement of assets and liabilities,” the balance sheet shows what your business owns, what it owes, and how much is left for you and/or your shareholders.
Think of it as a snapshot of your business’s “book value,” at a specific moment in time.
The balance sheet follows a very simple formula:
ASSETS = LIABILITIES + EQUITY
Assets are everything your small business owns, including current (short-term) and fixed (long-term) assets:
- Current assets are things you expect to convert into cash within a year—such as short-term investments and accounts receivable.
- Fixed assets, like property or equipment, are things you purchased for longer-term use to help generate income.
Meanwhile, liabilities are what you owe, also broken down by short- and long-term:
- Current liabilities, like credit card bills, upcoming loan payments, and accounts payable, refer to debts due within the next 12 months.
- Long-term liabilities are due beyond the next 12 months—such as term loans or mortgages.
Finally, equity is the portion of the business owned outright, once liabilities are paid off.
The ultimate goal is that both sides of the formula balance out (hence the name “balance sheet”).
Why? Because it means that every dollar that your business owns or controls is accounted for properly. This demonstrates financial integrity and transparency, which can build credibility with lenders, investors and auditors.
On the flip side, if your balance sheet is unbalanced, this means there is something wrong in your financial records. Perhaps you’re missing some transactions. Or your business’s assets, liabilities or equity aren’t recorded properly.
Regardless, these errors can eventually create challenges with tax filings, audits, investor confidence, and legal compliance.
Interpreting your balance sheet involves analyzing the relationships between assets, liabilities, and equity to assess financial health:
- Start with liquidity: Do your current assets exceed your current liabilities? If so, this means your business is in a good financial position, at least in the short-term, because you have enough liquidity to handle current (and even surprise) expenses. But if your liabilities are higher than your assets, this could mean you have cash flow issues.
- Next, check leverage: If your liabilities significantly outweigh equity, your business may be overleveraged, meaning it depends heavily on borrowed money. While debt can certainly fuel growth, excessive borrowing increases financial risk. Ideally, you want your SMB to maintain a balanced debt-to-equity ratio.
- Finally, look at profit retention: If your SMB’s equity is growing consistently, this suggests profits are being reinvested in expansion, equipment, or other improvements—a sign of financial stability and growth. Meanwhile, stagnant or declining equity could indicate poor financial management or recurring losses that require attention.
Comparing balance sheets over time reveals trends in asset growth, debt management, and overall financial stability.
But more than that, done properly, your balance sheet can guide your decision-making, providing you with confidence to plan for growth and new opportunities.
Income Statement
Also referred to as a “profit and loss statement” or “P&L statement,” this financial document helps you track how much money your business made or lost during a specific period.
Whether over a month, quarter, or entire year, the statement provides a clear view of whether your business was profitable—or if it ran at a loss.
The general formula is:
NET PROFIT (OR NET LOSS) = REVENUE – EXPENSES
Net profit/loss (aka your bottom-line) represents your business’s income after all expenses are deducted from revenues. If your revenue exceeds your expenses, you’ve made a net profit. However, if your expenses end up outweighing your income, you’ve recorded a net loss.
Revenue (sometimes referred to as sales, or total revenue) represents the total income your business brought in from selling products or services.
Meanwhile, your income statement also features expenses—essentially everything your business spent over a certain timeframe, including:
- Operating expenses: Add a line for each type of expense, including but not limited to rent and utilities, insurance, office supplies, maintenance and repairs, marketing, insurance, property taxes, and employee salaries and benefits.
- Non-operating expenses: These are costs indirectly related to your business operations, such as interest payments on loans or debt, losses from asset sales, restructuring costs due to business changes, and legal fees.
- Costs of goods sold (COGS): The total cost of producing or acquiring the goods or services you sell, including raw materials, labor, and manufacturing expenses.
- Selling, general, and administrative (SG&A) expenses: Overhead costs like office supplies, travel, and professional services.
- Depreciation and amortization: The gradual reduction in value of assets like equipment, property, and intangible assets over time.
Ultimately, your income statement tells the story of your business’s financial journey over time. Here’s how to read and interpret it:
- Evaluate your profitability: If you have steady profit growth and strong revenues, this means your SMB is not only healthy but likely ready for expansion. Conversely, declining profits could indicate increased costs, pricing issues, or inefficiencies that need addressing.
- Track revenue trends: Compare your revenue over different periods to understand your SMB’s sales growth. A sudden revenue surge could reflect a successful marketing campaign, while a drop could signal a seasonal shift or declining customer demand.
- Assess cost management: Are your expenses rising faster than revenue? Are certain expenses disproportionately high? Look at your income statement to pinpoint exactly where money is being spent. Then, consider cutting unnecessary expenses to improve your profitability.
Regularly updating and reviewing your income statement can help you make smarter and more strategic decisions, whether that means doubling down on what’s working, or tightening your belt in areas that aren’t.
Cash Flow Statement
This financial document tracks the flow of cash across your small business over a certain timeframe, helping you see how effectively your company is managing its cash.
More specifically, the cash flow statement focuses solely on liquidity: How much cash is coming in, how much is going out, and where it’s all going.
Generally, the cash flow statement includes three main components that feed into the following formula:
NET CASH FLOW = CASH FROM OPERATING ACTIVITIES + CASH FROM INVESTING ACTIVITIES + CASH FROM FINANCING ACTIVITIES + BEGINNING CASH BALANCE
Operating activities refers to the cash generated (inflows) or spent (outflows) for your core business operations. Operating activities may include customer or supplier payments, rent, wages, utilities, and taxes.
Meanwhile, investing activities represent any cash earned from, or spent on, long-term investments. Inflows may come from selling assets or collecting on business loans, while outflows often reflect capital expenditures and investments in your SMB’s growth.
Finally, the financing activities section shows how your small business is raising and repaying capital. Inflows may come from taking out loans or issuing stock, while outflows could include loan repayments, dividends, or stock buybacks.
Once you’ve tabulated your numbers, here’s how to analyze your cash flow statement:
- Assess your operating cash flow: If you have positive cash flow, that means your business is bringing in enough money from core operations to cover expenses. A negative result may point to high costs, slow sales, or inefficiencies. That said, a negative cash flow is not always bad if you’re investing in growth.
- Review your investing activities: If this section shows cash outflows, identify where you’re reinvesting in your SMB. Are you purchasing equipment or expanding operations? Such expenses are often signs of strategic growth. However, be sure your investing activities align with your long-term financial stability.
- Examine your financing activities: A positive cash flow here likely means you’ve secured new funding, whereas negative cash flow might mean you’re repaying debt, paying dividends, or buying back shares. A word of caution: If it’s consistently negative, this could mean you’re depleting cash reserves too quickly.
Overall, if your total cash flow is positive, that means you’re bringing in more cash than you’re spending, which is great news for your SMB!
If it’s negative, look deeper into where that money is going. As mentioned, a loss in investing or financing activities can be normal, but long-term negative operating cash flow is a red flag.
Supporting Financial Documents for Small Business
Beyond the three key financial documents, additional records play a crucial role in enhancing your SMB’s financial transparency, protecting against risks, and improving business decision-making.
First, there are your tax forms.
These records, when well-organized, can help prevent audits and compliance issues, as well as speed up tax filing. Meanwhile, be sure to file them on time. A missed tax deadline can result in a 5% penalty per month on the unpaid amount, up to as much as 25%.
You should also keep a record of all your business’s bank statements.
Not only can they support your tax filings and funding applications; they also help you efficiently track your income and expenses. If you need to reconcile your accounts, bank statements are helpful for comparing and contrasting, ensuring transactions match and are accurate.
If you’ve taken out financing, ensure your business loan agreements are accessible at a moment’s notice. This way, you can easily track and remain aware of repayment schedules, interest rates, fees and penalties. Keeping these records organized these documents can help your SMB avoid unexpected costs and manage debt effectively.
If you have business insurance, it’s a solid best practice to conduct an annual review of your policy. This way, you can ensure your coverage continues to match any evolving risks, from cyber threats to severe weather damages, as well as any developments in business growth.
Finally, it’s important to frequently review any aging reports. These financial documents categorize unpaid invoices into “buckets” by the amount of time they’ve been outstanding.
Best Practices for Managing Your SMB Financial Documents
More than mere records, financial documents are key decision-making tools to help you make all kinds of informed decisions about your small business.
Here are some tips for getting the most out of all your transactional statements:
Conduct Regular, Comparative Reviews
Whether quarterly or even monthly, review your financial documents to monitor your revenue growth, profit margins, and cash flow trends.
Meanwhile, comparing reports over time (whether quarter over quarter, or year-over-year) can reveal whether your business is consistently hitting its financial targets.
Optimize Your Record-Keeping Practices
Well-maintained balance sheets, income statements, and cash flow statements can be a major success factor in securing funding, investments and suppliers.
Consider using bookkeeping software to automate tracking, which will help eliminate some of the manual effort.
Meanwhile, because cybercriminals commonly target SMBs, be sure to keep digital as well as physical backups as part of your disaster recovery plan.
Hire Expert Help When Needed
As mentioned earlier, you don’t need to be an expert in SMB finances to work with financial documents. However, if you can afford it, it never hurts to consult a financial professional or accountant.
They can help with audits, tax planning, as well as longer-term financial strategies, providing key insights into your business’s financial health while also ensuring your business stays financially sound and compliant.
From Balance Sheets to Business Growth: Unlock Your SMB’s Potential With Bitty
Financial clarity isn’t just paperwork—it’s power.
When your small business’s financial documents are accurate and well-organized, you’re setting the stage for more strategic decision-making and stronger growth.
Moreover, when you need financing, having a solid financial foundation gives you an undeniable edge.
That’s where Bitty steps in.
We believe in empowering SMBs not just with financial education, but with fast, flexible funding solutions tailored to their unique needs.
Our revenue-based financing products adapt to your business performance, ensuring repayments stay manageable as you grow.
Ready to fuel your ambitions on your terms? Start your funding journey by contacting Bitty today.
