Why Small Businesses Need BOTH a P&L and a Balance Sheet
As a small business owner, you might already rely on your Profit & Loss (P&L) statement to track your income and expenses. While the P&L is essential for understanding profitability, it doesn’t tell the whole story. Many small business owners overlook their Balance Sheet, but doing so can leave them blind to key aspects of their financial health.
We’ll discuss why a Balance Sheet is just as important as a P&L statement, what small business owners miss when they don’t utilize it, and how both reports together provide a full picture of your business.
Why Small Business Owners Focus on the P&L
A Profit & Loss statement is straightforward and easy to understand:
It shows your revenue and expenses over a specific period.
It calculates whether you made a profit or incurred a loss.
Because it directly reflects the financial performance of the business, many small business owners think of the P&L as their primary financial tool. While the P&L is invaluable, it only provides insight into one part of your business’s financial story.
What is Missing Without a Balance Sheet?
The Balance Sheet complements the P&L by answering questions that the P&L cannot. Here’s what you might miss if you’re only using a P&L:
1. Financial Health Snapshot
The P&L shows whether you’re making money, but the Balance Sheet shows your overall financial health. For example:
Are you accumulating too much debt compared to your assets?
Do you have enough cash on hand to cover liabilities?
Without a Balance Sheet, you won’t know whether your business is financially stable or at risk of running into cash flow issues.
2. Liquidity and Cash Flow
The Balance Sheet provides insight into your liquidity—your ability to cover short-term obligations. By comparing your current assets (cash, receivables, etc.) to your current liabilities (payables, short-term loans, etc.), you can see whether your business has enough resources to stay afloat.
What you miss:
Imagine you’re reviewing your P&L and see that your business earned $10,000 in profit last month. However, your Balance Sheet might reveal that you’re low on cash and struggling to pay upcoming bills. Without this insight, you could make financial commitments you can’t meet.
3. Assets and Liabilities
The P&L doesn’t show what your business owns (assets) or owes (liabilities). These are crucial for understanding:
The value of your business
How much debt you’re carrying
Whether you’re reinvesting profits into growth
What you miss:
If your liabilities are growing faster than your assets, you might be on a path to financial trouble. The Balance Sheet helps you catch these issues early.
4. Equity Growth
The Balance Sheet shows your equity, or what remains after subtracting liabilities from assets. This represents the net worth of your business.
What you miss:
If you’re focusing only on profitability, you might overlook whether your equity is growing over time. Declining equity could signal that your business isn’t building long-term value, even if it’s currently profitable.
The Power of Combining the P&L and Balance Sheet
Using both the P&L and Balance Sheet together gives you a comprehensive view of your business:
The P&L tells you how much money you’re making or losing.
The Balance Sheet tells you whether you’re financially stable and able to sustain growth.
For example:
A profitable business on the P&L might still be struggling if the Balance Sheet reveals high levels of debt or low liquidity.
A business showing a small loss on the P&L might actually be healthy if the Balance Sheet shows strong assets and minimal liabilities.
Why Some Businesses Don’t Use a Balance Sheet
Many small business owners skip the Balance Sheet because:
They aren’t sure how to create one.
They don’t understand its purpose.
Their DIY bookkeeping software doesn’t emphasize it.
Unfortunately, neglecting the Balance Sheet can lead to incomplete financial management and missed opportunities.
How to Start Using Your Balance Sheet
If you’re new to using a Balance Sheet, here are some tips:
Automate It with Software: Tools like QuickBooks Online make it easy to generate accurate Balance Sheets alongside your P&L.
Review It Regularly: Analyze your Balance Sheet monthly or quarterly, just like your P&L.
Work with a Professional: A bookkeeper can help you set up and interpret your Balance Sheet, ensuring you’re leveraging it effectively.
At DPP Bookkeeping, LLC, we specialize in providing small business owners with clear, actionable Balance Sheets that complement their P&L statements.
The Bottom Line
While the P&L statement is essential for tracking income and expenses, it only tells part of the story. The Balance Sheet provides critical insights into your business’s financial health, stability, and value. By using both reports together, you’ll gain the clarity and confidence needed to make smarter financial decisions.
Ready to get the complete picture of your business’s finances? Contact DPP Bookkeeping, LLC or visit DPPBookkeeping.com to learn how we can help you create and utilize both P&L and Balance Sheet statements effectively.