An income statement, also known as a profit-and-loss statement, is one of the key financial documents investors use to find out how profitable a business is. For small business owners, it’s a major report that helps them determine their financial performance month to month (and for the year).
A company’s cash balance isn’t included on an income statement, and you’ll have to do more digging to get that amount. Understanding different financial statements types and how to find a company’s cash balance will give you one more piece of information you can use to judge the performance of the business to see if it is performing to its potential.
Read More: About Income Statements
What Is An Income Statement?
Along with a company’s balance sheet and cash flow statement, the income statement is one of the three main financial statements businesses use to gauge their performance, according to the Corporate Finance Institute.
An income statement shows more than just the money a business takes in. It is known as a P&L (profit-and-loss) statement because it also shows expenses and the bottom-line profit difference for a specific period of time. Most businesses that maintain P&L statements update them every month and prepare one for the year.
Information included in an income statement includes revenues, expenses, selling and administrative expenses, gross profits, other sources of income and expenses, taxes paid and net profit.
Finding the Cash Balance
You won’t be able to find the cash balance of a company on its income statement, although you can do a bit of detective work using the numbers to get an idea of what the figure might be. You get a company’s cash balance by looking for that entry on a balance sheet or cash flow statement. The number will be the same on both documents if they are up to date.
If you are trying to guesstimate a company’s cash balance using only an income statement, start by looking at the company’s net income for the period the statement covers. Next, look for any entries for depreciation. Add these amounts to the net income number.
Now, look to see if accounts payable (money owed but not yet paid) has increased. If so, subtract that number from the combined net income and depreciation amount. Add any increases to accounts receivable to this number. The result of these calculations will give you an idea of the company’s cash balance.
Read More: Does Equity Appear on the Income Statement?
Why Is This Important?
It’s very important for business owners to know their cash balance because it helps manage cash flow, which can make or break a company, especially a small business. Knowing how much cash it has helps a company determine if it is carrying too much cash – for example, the cash would be better used to pay down interest-bearing debt.
For investors, knowing the cash balance of a business helps show whether a business has enough operating capital, if it can service its debt and whether or not it can maintain necessary cash flow.
Steve Milano has written more than 1,000 pieces of personal finance and frugal living articles for dozens of websites, including Motley Fool, Zacks, Bankrate, Quickbooks, SmartyCents, Knew Money, Don't Waste Your Money and Credit Card Ideas, as well as his own websites.