<h2 id="one-of-the-most-common-reasons-that-businesses-fold-is-that-they-run-out-of-money-this-doesn-t-necessarily-mean-that-they-didn-t-have-enough-customers-many-do-but-rather-that-their-expenses-exceeded-their-revenue-they-couldn-t-sell-enough-to-cover-their-costs">One of the most common reasons that businesses fold is that they run out of money. This doesn't necessarily mean that they didn't have enough customers – many do – but rather that their expenses exceeded their revenue: They couldn't sell enough to cover their costs.</h2><p>In fact, according to U.S. Bank data, <a href="https://www.preferredcfo.com/cash-flow-reason-small-businesses-fail/">82 percent</a> of businesses have poor cash flow management processes and/or a poor understanding of cash flow management and, according to a CB Insights study, <a href="https://s3-us-west-2.amazonaws.com/cbi-content/research-reports/The-20-Reasons-Startups-Fail.pdf">29 percent</a> run out of cash altogether.</p><p>While financial statements can help business owners spot upcoming financial challenges, such as running low on inventory or raw materials, sometimes the problem is that they're using their financial statements incorrectly or ineffectively. This can lead entrepreneurs to overlook important warning signs specific to cash flow or operations, or to miss upcoming opportunities.</p><p>Financial statements are a critical section of any business plan, whether the company is pursuing outside financing or creating more of an internal operating manual. There are three primary financial statements a business needs to generate and regularly monitor:</p><ul><li><p><strong>Profit and loss statement, or P&amp;L, also known as the income statement</strong></p></li><li><p><strong>Balance sheet</strong></p></li><li><p><strong>Cash flow statement</strong></p></li></ul><p>Each statement provides insights into how the business is doing that can help owners and managers recognize how to improve operations. But because each statement serves a different purpose, it's important to know how to best use each one.</p><h3>Profit and Loss Statement</h3><p>Your P&amp;L, or income statement, is an overview of your company's operations over a specific period of time – usually one year. It is a reflection of the business's financial performance or health. It's also generally used as a look back, although you can certainly use it when creating projections as well.</p><p>Your P&amp;L summarizes how much revenue you generated, what your total expenses were, and what your resulting profit (or loss) was once those expenses were subtracted from your revenue.</p><p>The P&amp;L is a useful tool for comparing performance and assessing growth. You can compare past years' P&amp;L figures to your current and future years to see if your business is growing or shrinking.</p><p>Profits generated can then be used to buy more assets, reinvested in the business, applied to reduce liabilities, or paid out to owners as a dividend or bonus, all of which will be reflected on the balance sheet. That's how the two documents are related.</p><h3>Balance Sheet</h3><p>While your P&amp;L reflects how much money came in and how much went out over the course of a year, a quarter, or a month, your balance sheet is a statement of what your business owns and what it owes at a particular point in time (the most common date used is 12/31).</p><p>At the top of the statement are all of your business assets – the things you own. This includes your property, plant and equipment – your long-term assets. Any real estate, computer equipment, raw materials, inventory and machinery would be included in this list. Short-term assets, such as accounts receivable (what your customers owe you), also fall into this category. Anything you use to generate income should be listed under assets.</p><p>Your liabilities and shareholders' equity goes on the bottom half of your balance sheet. Liabilities are what you owe. This includes expenses like building or equipment leases, loans, taxes owed and unpaid invoices.</p><p>Your shareholders' (or owners') equity is the value the business has created, which is shared by your shareholders – all your partners or owners in the business.</p><p>Shareholders' equity plus liabilities always equals your assets. The higher the shareholders' equity, the more value the business is creating.</p><h3>Cash Flow Statement</h3><p>Your cash flow statement is a look at all the money the business has earned and paid out over a period of time. Cash flow statements are frequently used for projections – for looking ahead to try and anticipate when the company might need an infusion of cash or be able to afford a major investment. For that reason, cash flow statements often break down cash inflow and outflow on a monthly basis.</p><p>Cash coming into the business can be generated by operations (what you sell to customers), investments (such as stocks or real estate), and/or financing (such as when you receive a loan or take on an investor).</p><p>When cash is paid to buy more assets or to pay back a loan or credit extended, those amounts fall under cash outflow.</p><p>Analyzing changes in cash flow over several periods, such as months or quarters, gives you, lenders or investors a sense of how cash-healthy the company is.</p><h3>Putting It All Together</h3><p>Where P&amp;L statements provide an overview of how a business is doing, a cash flow statement can shine a spotlight on the peaks and valleys many companies experience during a typical year. For example, if you're a swimming pool retailer, your projections for the spring and summer months will likely go way up with demand, while cash flow in the winter months – at least in the north – may plummet. It's important to be prepared to sustain the business during November, December and January when you may have little in the way of cash coming in.</p><p>Your balance sheet is a reflection of how well you're using your company's assets. Over time, your assets and shareholders' equity should steadily rise, while your liabilities should decline. If they're headed in the other direction, you may be headed for a cash crunch.</p><p>These three financial statements are important business tools that can help you recognize where your attention needs to be directed in order for your business to grow. Update and look at them regularly to keep cash steadily flowing in, in order to bulk up your P&amp;L and your balance sheet – and to help ensure your business survives and thrives.</p><h3 style="text-align:center;">Looking for additional guidance? Connect with a First Horizon <a href="/business/commercial-banking-solutions">banker</a> to learn more.</h3>

3 Financial Statements Your Business Plan Must Include

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3 Financial Statements Your Business Plan Must Include