Financial statements: types, examples and how to use

Published Wednesday 1 April 2026

Table of contents

• What is a financial statement?
• Types of financial statements
• Why financial statements are important for small businesses
• When to prepare financial statements
• How to use financial statements to analyse your business
• How to prepare financial statements for your small business
• Financial statement templates for your business
• Ways to use your financial statements
• Streamline your financial statements with Xero
• FAQs on financial statements

Key takeaways

• Prepare financial statements regularly (monthly for cash flow tracking, quarterly for performance reviews, and annually for tax compliance) to spot trends early and make informed business decisions before problems arise.
• Review all three main financial statements together rather than focusing only on profit, as the balance sheet, income statement, and cash flow statement each reveal different aspects of your business's financial health.
• Calculate key financial ratios like the current ratio and quick ratio using your balance sheet to assess whether you can cover short-term obligations and manage debt effectively.
• Track the difference between revenue and actual cash flow, as profitable businesses can still face cash shortages when sales haven't yet converted to available funds in your bank account.

What is a financial statement?

A financial statement is a formal record of your business's financial activities and performance over a specific period, often prepared using principles like the International Financial Reporting Standards (IFRS) relied on by over 160 jurisdictions worldwide. Lenders and investors use financial statements to assess your business's financial health and earnings potential.

Financial statements typically cover a month, quarter, or year. For instance, to promote transparency, the U.S. Securities and Exchange Commission (SEC) has required public companies to file quarterly and annual reports since 1970.

Types of financial statements

The three main types of financial statements are the balance sheet, income statement, and cash flow statement. A fourth report, the statement of changes in equity (also called a retained earnings statement), provides additional insight into how your business reinvests profits.

Together, these statements give you a complete picture of your business's financial health.

Balance sheet

A balance sheet shows your business's financial position at a specific point in time by comparing what you own with what you owe.

The balance sheet includes three components:

• Assets: what your business owns, such as cash, equipment, inventory, and intellectual property
• Liabilities: what your business owes, such as loans, accounts payable, and other debts
• Equity: the difference between assets and liabilities, representing your ownership stake in the business

The formula shown above helps you find equity.

This formula helps you evaluate the financial stability of your business.

Income statement/Profit and loss statement

An income statement (also called a profit and loss statement) shows your business's revenues and expenses over a specific period. The difference between the two is your net income or net loss.

Here's a simple example for a manufacturing business:

• Revenue: $150,000
• Operating expenses: $50,000 (office rent, utilities)
• Cost of sales: $70,000 (materials, labour)
• Net income: $30,000

Cash flow statement

A cash flow statement tracks the movement of cash in and out of your business over a specific period. It shows whether you have enough cash to cover short-term expenses like bills and payroll.

The cash flow statement records three types of activities:

• Operating activities: cash from day-to-day business operations, like customer payments
• Investing activities: cash spent on or received from assets, like equipment purchases or sales
• Financing activities: cash from loans, investor funding, or dividend payments

Statement of changes in equity

A statement of changes in equity (also called a retained earnings statement) shows how much profit your business keeps after paying all costs and dividends. This statement demonstrates your business's capacity for growth and reinvestment.

Common uses for retained earnings include:

• repaying debt
• reinvesting in equipment or expansion
• building a cash reserve for unexpected costs

Why financial statements are important for small businesses

Financial statements help you make smarter decisions by giving you a clear view of your business's financial health. When you understand your statements, you can spot opportunities, avoid problems, and plan for growth.

Here's how financial statements benefit your small business:

• Assess financial health: See your profitability, cash position, and costs clearly so you can make stronger financial decisions
• Attract investors and secure loans: Show lenders and investors that your business is profitable and can repay its debts
• Comply with tax requirements: Meet reporting rules and tax obligations with accurate, complete records
• Track business performance: Identify trends over time and spot areas that need improvement or investment
• Manage your cash flow: Ensure you have enough cash for expenses, payroll, and unexpected costs
• Make informed decisions: Use accurate data to guide business decisions that support growth

When to prepare financial statements

Prepare financial statements regularly to stay on top of your business's financial health. The right frequency depends on your business needs, industry, and growth stage.

Here's when most small businesses prepare financial statements:

• Monthly: Track cash flow and expenses closely, especially during growth phases
• Quarterly: Review performance trends and make adjustments before year-end
• Annually: Meet tax requirements and assess overall business performance, which aligns with international standards like IAS 1 requiring an entity to present a complete set of financial statements at least once per year.
• Before seeking funding: Lenders and investors expect up-to-date statements
• At key decision points: Prepare statements before major purchases, expansions, or strategic changes

Regular reporting helps you spot trends early and react quickly to opportunities or problems.

How to use financial statements to analyse your business

Each type of financial statement helps you assess a different aspect of your business's finances. Understanding how to analyse them supports better decision-making and accurate tax reporting.

Analyse financial performance with the income statement

Use the income statement to:

• Evaluate profitability: Compare total revenue against expenses to see whether your business is making or losing money
• Monitor expenses: Identify where you may be overspending by reviewing categorised costs like goods sold and operating expenses
• Track growth trends: Compare statements across periods to assess revenue growth, cost efficiency, and profit margin changes

Information from the income statement is used, in particular, to calculate three important metrics: gross profit, operating income, and net income. These calculations indicate whether you need to adjust prices and reduce costs to improve profitability.

Manage assets and plan for growth with the balance sheet

The balance sheet helps you:

• Assess liquidity: Compare current assets to current liabilities to determine whether you can cover short-term obligations
• Evaluate solvency: Examine long-term liabilities and equity to gauge your business's financial stability, an area so important that accounting standards have been amended to improve information on liabilities subject to compliance with covenants.
• Track asset management: Review how efficiently you're using inventory, property, and equipment to generate revenue

Use your balance sheet to calculate key financial ratios that reveal your business's ability to pay its bills and manage debt.

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Here's what each liquidity ratio tells you:

• Cash ratio: Shows whether you have enough cash to cover payroll, expenses, and loan payments over the coming year
• Quick ratio: Indicates whether you can cover core costs over the next three months using liquid assets only
• Current ratio: Includes inventory value to help you make decisions about expenses and cash on hand

Manage your cash flow with the cash flow statement

A strong cash flow means your business can pay its bills, cover payroll, and handle unexpected costs. Use the cash flow statement to identify where your cash comes from and where it goes.

The cash flow statement helps you:

• Analyse operating cash flow: Determine whether core business activities generate enough cash to sustain operations
• Judge investment quality: Track spending on equipment and expansion to see whether you're reinvesting for growth
• Monitor financing activities: Review cash from loans, equity, or dividends to understand how external funding affects your cash position

Analyse growth with the retained earnings statement

The retained earnings statement reveals two key indicators:

• Growth potential: Increasing retained earnings suggest your business can reinvest profits without borrowing
• Financial health: Declining retained earnings may signal that profits are being used to cover losses or debts

How to prepare financial statements for your small business

Preparing financial statements is straightforward when you follow a consistent process. Here's how to create accurate statements for your business.

1. Gather your financial documents: collect bank statements, receipts, invoices, and payroll records for the reporting period.
2. Choose your reporting period: decide whether you're preparing monthly, quarterly, or annual statements based on your needs.
3. Record all revenue: document income from sales, services, and other sources.
4. Track all expenses: categorise operating costs, cost of goods sold, and depreciation.
5. Reconcile your accounts: match your records against bank statements to catch errors or missing transactions.
6. Calculate key figures: work out totals for assets, liabilities, and equity (balance sheet), net income (income statement), and cash movements (cash flow statement).
7. Review for accuracy: double-check calculations and ensure transactions are categorised correctly.
8. Use accounting software to automate: tools like Xero generate statements automatically, reducing manual work and errors.

Financial statement templates for your business

Templates make creating financial statements faster and easier. Use pre-made formats to build balance sheets, income statements, and cash flow statements consistently, saving time you can put back into running your business.

Get started with Xero's free financial statement templates.

Ways to use your financial statements

Consider the big picture, not just profit

Review all three statements together to get a complete picture of your financial health. Focusing only on net income can leave you vulnerable to cash flow problems that don't show up on the income statement.

Pay attention to your cash flow

Profitable businesses can still run out of cash. Check your cash flow statement regularly to ensure you have enough liquidity to cover short-term expenses.

Know the difference between revenue and cash

Revenue isn't the same as cash. Sales you've recorded may not have reached your bank account yet. Track accounts receivable separately so you always know how much cash you actually have available to spend.

Analyse trends by comparing your financial statements

Compare statements across multiple periods to spot patterns in revenue, expenses, and liabilities. Use these trends to invest in areas performing well and address parts of your business that need improvement.

Get across your financial ratios

Financial ratios reveal deeper insights into your business's liquidity, profitability, and overall health. Learn to calculate and interpret ratios like the current ratio and quick ratio to make more informed decisions.

Streamline your financial statements with Xero

Managing your finances well gives your business a better chance of success. Xero accounting software makes financial management easier by:

• automating financial report creation
• providing real-time insights into your business performance
• integrating payroll and invoicing in one platform

FAQs on financial statements

Here are answers to common questions about financial statements.

What's the difference between the income statement and cash flow statement?

The income statement shows whether your business is profitable by tracking revenue and expenses. The cash flow statement shows how cash moves in and out of your business. Understanding both helps you see the full picture of your finances.

Does my small business need all four types of financial statements?

Most small businesses need the three main statements: balance sheet, income statement, and cash flow statement. Recognising the distinct needs of these businesses, standard-setting bodies have created specific guidelines like the IFRS for SMEs Accounting Standard. The retained earnings statement is useful if you plan to reinvest profits into growth projects or debt repayment.

How often should I prepare financial statements?

Prepare financial statements monthly, quarterly, or annually depending on your business needs. Regular reporting helps you spot opportunities and problems faster.

Can I automate my financial statements?

Yes, accounting software can automate your financial statements.Xero automatically generates reports, saving you time, reducing errors, and simplifying tax compliance.

What do investors and lenders look for in financial statements?

Investors and lenders review financial statements to assess risk and repayment ability. They typically look for:

• consistent revenue growth and profitability trends
• strong cash flow from operations
• healthy debt-to-equity ratio
• sufficient assets to cover liabilities
• clear evidence you can meet financial obligations