The Three Financial Statements Every Business Buyer Should Understand

The three financial statements used to evaluate a business: the income statement and cash flow statement (each covering a period of time), and the balance sheet (a snapshot at a single point in time).

Why it matters: Knowing how these three statements connect — and which ones actually get used in a typical Main Street deal — saves a lot of confusion in diligence. Net Operating Income from the income statement flows into the cash flow statement, which adjusts for non-cash items like depreciation and interest to show real cash movement, and also draws on beginning/ending balance sheet figures to measure investing and financing activity. In practice, though, most buyers on smaller deals ask for the income statement first, then the balance sheet — the cash flow statement often never comes up at all. Tax returns are almost always requested during diligence regardless, even though they aren't technically a financial statement themselves (a single-member LLC, for instance, isn't required to include a balance sheet on its return, which can leave a gap a buyer needs to fill another way).

Example: A buyer requests three years of P&Ls and the current balance sheet for a retail business, gets both within a week, and never asks for a cash flow statement — a fairly typical pattern for a sub-$3M deal, even though a cash flow statement would have shown that the business was carrying more short-term debt than the P&L alone suggested.

Financial Statements at a Glance

	Income Statement	Cash Flow Statement	Balance Sheet
Span	Period of time	Period of time	Point in time
Measures	Revenue, expenses, profit	Cash in/out by activity	Assets, liabilities, equity
Governing logic	Revenue − Expenses = Net Income	Adjusts net income for non-cash items	Assets = Liabilities + Equity

Related terms: Balance Sheet, Cash Flow Statement, Profit & Loss Statement (P&L), GAAP