Many small business owners take their financial statements and put them on the back burner. This lack of attention can result in the business owner being caught in a cash flow crunch or, worse, waking up one day to ask, “Where has my money gone?”

An income statement or profit and loss statement is like a report card showing how your business performed over a specific time period, like a quarterly report card from elementary school. That time period can be whatever the business owner sets it as — daily, weekly, monthly, quarterly or annually. The most common time period to use is monthly, with the statement simply showing the business’s revenue and expenses. Net income is calculated to show if there was a profit or loss.

So what are revenue, expenses and net income? Revenue is simply any money brought into the business. Typically, income is generated by some type of sales for the business. Expenses are costs or what was paid out during a time period to support the business functions, like sales. The expenses listed on the income statement are typically those allowed by the IRS for tax deductions. Net income is a reflection of how the business handled the inflow of revenue versus the outflow of expenses for the time period.

Many startups will show a negative on this report until they start to generate enough sales to cover startup expenses. It is advised that a new entrepreneur really know how long he or she feels the business will be in the “red” so that enough funding can be injected into the startup.

A fact that often trips up business owners is that though the income statement shows a profit, there may not be a “real” profit in the sense of the business having made money during that time period. That's because noncash expenses — like depreciation and amortization — are included in this report, which can result in a business having cash flow but no profit.

Your area Missouri SBDC can help answer questions, offers training and one-on-one appointments; reach out to a location near you.

The Missouri SBDC is funded in part through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, conclusions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.