Income Statements vs. Balance Sheets: What’s the Difference?

As a business owner, you understand that success requires more than expertise in your field—it demands a comprehensive grasp of your financial health. Two of the most important financial documents of any small business are income statements and balance sheets.
While both provide valuable information and insights, they serve different purposes. Here, we’ll go over the difference between income statements and balance sheets, how each tells a different part of your financial story, and how you can use them to make more informed business decisions.
Income Statements
What is an income statement? Also known as a profit and loss statement (P&L), an income statement covers:
- Expenses
- Revenue
- Profitability
Of a specific time period, typically monthly, quarterly, or annually. An income statement helps you answer the question, “Is my business making money?”
How to Use Your Income Statement
There are three main ways you can leverage your business’s income statement, no matter the industry you operate in.
1. Track Profitability
For long-term growth and sustained success, you need to know exactly how much money your business is making over time. With help from income statements, you can easily keep tabs on your profitability. The specific time period you need your income statements to cover depends on a range of factors, including how tight the profit margins are in your industry and your financial goals.
2. Identify Trends
Business income statements are like snapshots of your financial health in a given period of time. Therefore, they can be used to not only compare the financial performance of your company across periods but to also identify growth opportunities and potential risks.
3. Plan Strategically
With the hard data laid out in front of you, it becomes much easier to see how your business is performing. You can use the insights learned over the months, quarters, and even years to make a strategic financial plan for the months ahead. Seeing if you need to reduce costs, invest in expansion efforts, or if cost adjustments are needed can all be learned from income statements.
Balance Sheets
What is a balance sheet? It’s similar in that it provides a snapshot of your financial position. However, unlike income statements that cover a period of time, balance sheets display information at a specific moment in time.
Additionally, balance sheets display different information. They show your assets (what your business owns), your liabilities (what it owes), and the equity you have as the owner of the company.
If an income statement answers, “Is my business making money?” your balance sheet answers, “What is my business worth?”
How Balance Sheets Help Your Business
Once you learn how to read a balance sheet, it’s easy to see the three major ways they can be used to fuel business success.
1. Assesses Financial Stability
As time goes on, you’ll want to have more assets than liabilities. A balance sheet can show if you’re trending in the right direction, which helps establish a solid financial foundation. If your assets and equity aren’t growing over time, you may need to shift gears and come up with a new plan of action for your company.
2. Helps With Loan Applications
Because a balance sheet is another way to evaluate the financial health of a business, it can be used by lenders or even investors. If you’re considering a loan or financial backing, be sure to have your balance sheets readily available.
3. Aids Business Valuation
Balance sheets can help show the true value of your company. They can be great tools for long-term planning, potential mergers, and even selling your business, should the time ever come.
Strengthen Your Financial Strategy
Here at Unity Business Advisors, we believe that whether a statement or sheet, financials should do more than simply report numbers—they should guide strategy and fuel business growth. We’ll go beyond the basics to deliver comprehensive business solutions and insights that help your company thrive. Connect with us to build a smarter financial future for your business!
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