Understanding, creating, and using financial statements can help you run and grow your business.
Let's be honest — financial statements can feel overwhelming at first. But here's the thing: there are only three of them, and each one tells you something different and important about your business. Together, they paint a complete picture of your company's financial health.
You don't need to be an accountant. But a basic understanding of your numbers will put you in a much stronger position — both at the lender's table and in running your business day to day. The three statements lenders will ask for:
Shows your revenue, expenses, and net income over time
A snapshot of what you own, what you owe, and your equity
Tracks how money flows in and out of your business
Together, your P&L, balance sheet, and cash flow statement give lenders — and you — a complete picture of your business's financial health.
If you’re interested in starting or expanding a business, you’ll likely encounter lots of terms and acronyms.
P&L, balance sheet, and cash flow essentials — what they are and what lenders look for.
Don’t worry if you don’t understand everything about basic financial statements on your first read through. Take in what you can and feel free to skip parts that are confusing. Come back later and give the section a second read.
Probably one of the first things that helps make money in your business — the P&L is a financial document that shows your business’s revenue, expenses, and profitability over a specific period of time (usually monthly, quarterly, or annually).
Think of it as your report card: it shows whether your business made money (profit) or lost money (loss) during the period. Lenders and investors look at it to see whether your business is profitable and how well you manage expenses.
Revenue – Cost of Goods Sold = Gross Profit
Gross Profit – Operating Expenses = Net Income (or Loss)
Your gross profit margin shows how efficiently you produce your goods or services. Your net income shows what’s left after all operating costs — rent, payroll, utilities, marketing — are paid.
Young or growing businesses may show a net loss — that’s okay. What matters is the trend: is the business moving toward profitability over time? Lenders look at your gross profit margin, operating profit margin, and net profit margin to evaluate your financial performance and sustainability.
Gross profit margin is gross profit (revenue minus the direct costs of producing your goods or services) divided by total revenue.
Operating profit margin takes that further by also subtracting your operating expenses—things like rent, payroll, and utilities—then dividing by total revenue.
Net profit margin goes one step further still, subtracting interest and taxes to arrive at your true bottom line, then dividing by total revenue.
Astrid Daniela Galvez—QuickBooks ProAdvisor, Tax Specialist, and Craft3 partner—breaks down key financial statements in this quick video. Learn how to read and use them to gauge your business’s financial health, spot profits, and identify where you can improve.
A balance sheet is a snapshot — it shows what your business owns (assets), what it owes (liabilities), and your equity (net worth) at a specific moment in time, usually at the end of a fiscal year or quarter.
Think of it as a financial photograph: it captures everything about your business’s financial position right now. It’s different from the P&L, which covers a period of time — the balance sheet is a single point in time.
Current Assets + Fixed Assets = Total Assets
Current Liabilities + Long-Term Liabilities = Total Liabilities
Total Assets – Total Liabilities = Net Worth (Owner’s Equity)
Assets include cash in the bank, accounts receivable, inventory, equipment, real estate, and any other items of value your business holds. Liabilities are your debts — what you owe to banks, suppliers, employees, or other creditors.
Lenders pay close attention to your net worth: a positive number (more assets than liabilities) signals financial strength. They also look at your debt-to-net worth (leverage) and your current ratio (current assets ÷ current liabilities) to assess whether you can meet your short-term obligations.
When a creative and talented chef contacted us about a loan to turn his side business into a full time venture, he had a solid business plan and delicious products. But up to this point he hadn't done any formal bookkeeping. We looked at his Square receipts and put together some financial projections before issuing a $45,000 loan. We're often able to work with entrepreneurs who have strong businesses, but incomplete financials or unconventional bookkeeping.
The cash flow statement tracks how money moves in and out of your business during a specific period. This is what many lenders consider the most important of the three statements — because a business can show a profit on paper and still run out of cash.
Your cash flow statement is divided into three sections:
Operating activities — cash generated or used by your day-to-day business operations (sales, payroll, rent, supplies)
Investing activities — cash used to buy or sell long-term assets like equipment or property
Financing activities — cash from or to investors, banks, or owners (loans received, loan payments, owner draws)
Lenders use your cash flow statement to calculate your Debt Service Coverage Ratio (DSCR) — the most important number in your loan application. It measures whether your business generates enough cash to cover loan payments. A DSCR above 1.25 is generally what lenders look for.
Learn more about DSCR on our Loan Fit pageIn addition to often being able to work with incomplete financials, Craft3 offers resources to help you understand and create your own basic financial statements.
Our network of professionals is part of the value of working with Craft3. We may not have all the answers, but we know someone who does. We also can connect you to certified public accountants (CPAs), bookkeepers, and other service providers.
It’s OK if you’re not able to produce financial statements that are up to an accountants’ standards. Gaining new skills takes time. Partial financial statements are better than none at all. And if you end up working with a bookkeeper or other professional, understanding the main concepts behind key financial statements is very helpful.
Getting comfortable with financial statements takes time—and that’s okay. You don’t have to be an accountant to understand the basics or to take meaningful steps toward loan readiness.
Even starting small—like organizing your income and expenses—is a step in the right direction.
Need a little extra help?
You've got this—one step at a time.
Get the resources you need to feel confident and prepared as you grow your business and explore financing options. Each download is designed to make complex concepts simpler and help you move forward with clarity.
Complete E-Book! Everything you need to know to apply for a business loan — business plans, financial statements, lender conversations, and documents. Free from Craft3.
If you’re interested in starting or expanding a business, you’ll likely encounter lots of terms and acronyms.
A printable one-pager summarizing the key sections every strong business plan should include.
A quick-reference guide covering the essentials of income statements, balance sheets, and cash flow projections.
A printable worksheet to help you decide if financing is the right move for your business goals.
A practical worksheet featuring common lender questions, insights into what they’re really listening for, and space to organize your key talking points.
A printable guide to help you see your loan application from a lender’s perspective and prepare more strategically.
A checklist of the financial and business documents lenders typically require when applying for a loan.
A reflective worksheet to help you assess your business's current position and plan ahead for success.
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