Documenting your business’s financial status is a fundamental part of running a business, even if it isn’t the most enjoyable. There are a few documents that nearly all businesses, from a beginning freelancer to a Fortune 500 company, should regularly update and study. Banks, investors, and other lenders will usually require 3 financial documents in making funding decisions: the profit and loss statement, the balance sheet, and the cash flow statement. These 3 data sets are not only the standard reports for rating a company’s financial health externally—they’re also essential for small business owners to truly understand how your company is faring internally. 1. The Profit and Loss Statement A profit and loss (P&L) statement presents a company’s revenues, costs, and expenses across a specified period of time. Sometimes called an income statement, P&L statements are created on a regular basis, often annually, quarterly, or monthly. These statements display whether a company turned a profit or lost money for the specified time period. The business press and investors always eagerly await P&L statements from publicly traded companies because the information is clear, easy to digest, and hard to spin. Similarly, the quick hit of data provided by a P&L statement is incredibly useful for understanding the financials of your company at the moment. “Small business owners should look at this report at least monthly,” suggests Eric Rosenberg of Due. “It is also a good idea to look at trends, comparing current results to the same period in the prior year and comparing the most recent month with the last few months. This should tell you what’s working well, what isn’t, and help you to focus on the most profitable parts of the business.” P&L statements are most useful when you can put them into context—this way, you can see how your business is performing over time. 2. The Balance Sheet While a P&L statement shows how your business performed over a period of time, a balance sheet gives an immediate snapshot of your company’s financial situation at the present moment. There are 3 main components to a balance sheet: assets, liabilities, and shareholders’ equity, also called owners’ equity. “It shows what your small business owns, owes, and what shareholders have invested in your small business,” Elizabeth Macauley notes in The Hartford’s Small Biz Ahead blog. “This math serves as the foundation of your balance sheet.” Your assets should equal your liabilities plus owners’ equity. Assets include cash in your bank account, inventory, and real estate, while liabilities most commonly include debts. The owners’ equity equals assets minus liabilities. “Every balance sheet should balance,” Macauley continues. “You’ll know your sheet is balanced when your equation shows your total assets as being equal to your total liabilities plus shareholders’ equity. If these are not equal, you will want to go through all your numbers again.” Your balance equation should always be equal if you are doing the math correctly. If your company’s liabilities overwhelm your assets, your owners’ equity can be negative. 3. The Cash Flow Statement While a P&L statement displays profitability over time and a balance sheet shows your financial situation at a given moment, a cash flow statement reveals how money is moving in and out of your business. Cash can come in through sales, financing, and investments. Money outflows through expenses, wages, taxes, and other costs. “Cash flow statements are used to evaluate the financial health of a business as well as to provide a full picture of how it spends and invests the money it already has,” Mona Bushnell explained at Business.com. This statement helps you to understand your cash flow, which is often the lifeblood of any small business—especially new ones. Cash flow is critical, as it dictates how much money you have on hand to cover expenses. If you’re frequently running out of cash due to customers paying late or financial mismanagement, you could soon face a brutal cash crunch. 4. Accounts Receivable and Accounts Payable Aging Reports While not as critical for funding as the other 3 documents, reports about your invoicing situation are an important metric for understanding your cash flow. An accounts receivable aging report organizes your invoices by separating those that have been paid from those that are outstanding. For your outstanding invoices, you can then organize them by how delinquent they are. As clients enter into new levels of delinquency, you can easily see who needs a reminder—and who needs something sterner. “An aging report is used to show the outstanding customer invoices and the number of days they’ve been outstanding,” the Corporate Finance Institute notes. On the opposite end, an accounts payable aging report shows what invoices you need to pay and how much time you have left to pay them. Alongside your cash flow statement, you can see how your expenses should be paid over time.