The Triple Play: 3 Key Financial Reports Every Business Should Use

In baseball, a triple play is a rare but powerful defensive move that can shut down the competition in one swift motion. In business, your version of a triple play comes in the form of three essential financial statements. Together, these reports provide a comprehensive understanding of your company's profitability, liquidity, and long-term sustainability. When used strategically, they can help keep your business on track and ahead of the curve.

First Base: The Income Statement
Also known as the profit and loss (P&L) statement, the income statement summarizes your company's revenues, expenses, and net income over a specified period. Think of it as your business's scoreboard; it tells you whether you're winning or losing.

While the "bottom line" (net profit or loss) often draws the most attention, smart business owners dig deeper. Some key metrics to monitor include:

• Gross profit: Revenue minus cost of goods sold (COGS), which includes the direct costs of labor, materials, and overhead used to produce your goods or services.
• Net income: What's left after accounting for all expenses, including payroll, rent, marketing, interest, and taxes.
• Expense trends: Are fixed costs staying flat while revenue grows? Are variable costs increasing faster than sales? These indicators can help guide strategic decisions.

Evaluating these figures over time helps you identify patterns, track profitability, and determine which products or services contribute most to your bottom line.

Second Base: The Balance Sheet
The balance sheet (also known as the statement of financial position) provides a snapshot of your business's financial health at a single point in time. It lists your company's assets, liabilities, and owners' equity, and helps you assess both short-term liquidity and long-term solvency.

Here's what to watch:

• Assets: Split into current assets (cash, accounts receivable, inventory) and long-term assets (property, equipment). Assets are generally reported at the lower of cost or market value under U.S. GAAP.
• Liabilities: Current liabilities encompass obligations that are due within a year, such as accounts payable. Long-term liabilities include loans and other debts maturing beyond 12 months.
• Equity: The difference between assets and liabilities, essentially, your company's net worth.

Also worth noting:

• Internally developed intangible assets (your own customer list or intellectual property) are generally not listed on the balance sheet, as their costs are expensed as incurred.
• Equity changes over time based on profits, losses, owner contributions, or distributions. These changes may also be shown in a Statement of Retained Earnings.

If liabilities outweigh assets, equity becomes negative—an important warning sign that may not be visible in the income statement alone.

Third Base: The Statement of Cash Flows
Profit is great, but cash is what keeps your business alive. The statement of cash flows tracks how cash enters and exits your company through three primary channels:

1. Operating activities: Cash generated from or used in daily business operations (collections, vendor payments, payroll).
2. Investing activities: Cash used for or generated by the purchase or sale of long-term assets (property or equipment).
3. Financing activities: Cash raised from or paid to investors and creditors (loans, dividends, or capital contributions).

The bottom of this statement shows your net change in cash for the period. Monitoring this report helps ensure you have enough liquidity to meet obligations, fund opportunities, and adapt to market changes.

What's Your Game Plan?
These three statements work together to paint a full picture of your business's financial condition, and relying on only one can leave you vulnerable. For example:

• A strong income statement might mask cash flow issues.
• A profitable year could still result in declining equity if excessive debt is incurred.

Don't wait until year-end or a lender asks for reports to understand your numbers. Reviewing these statements regularly, and understanding how they connect, can help you identify risks, capitalize on opportunities, and make more informed decisions year-round.

Brinker Simpson is here to help you interpret the numbers and turn your financial data into meaningful, forward-looking strategy. Let's talk about how your triple play is performing.