Financial Statement Guide: Types, Uses & Tips

Published Friday 5 December 2025

Table of contents

• Types of financial statements
• Why financial statements are important for small businesses
• How to use financial statements to analyse your 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

• Review all three core financial statements (balance sheet, income statement, and cash flow statement) together regularly to get a complete picture of your business's financial health and spot potential issues before they become serious problems.

• Calculate key financial ratios like the current ratio and quick ratio from your balance sheet to assess whether you have enough cash and liquid assets to cover short-term expenses and obligations.

• Distinguish between recorded revenue and actual cash on hand by tracking accounts receivable separately, as profitable sales don't always translate to immediate cash availability for business expenses.

• Compare your financial statements across multiple periods to identify trends in revenue, expenses, and cash flow that can guide strategic decisions about where to invest and which areas need improvement.

Types of financial statements

Financial statement types fall into four main categories that work together to show your business's complete financial picture:

• Balance sheet: Shows what you own and owe at a specific point in time
• Income statement: Reveals your revenue, expenses, and profit over a period
• Cash flow statement: Tracks money moving in and out of your business
• Statement of changes in equity: Shows how much profit you retain for growth

Balance sheet

A balance sheet compares what your business owns (assets) against what it owes (liabilities) at a specific point in time. This snapshot helps you understand your financial position and business value.

Key components:

• Assets: Cash, inventory, equipment, property, and intellectual property
• Liabilities: Loans, accounts payable, and other debts
• Equity: The difference between assets and liabilities (what you actually own)

To find the equity, use this formula: equity = total assets − total liabilities.

This formula helps you work out how financially stable your business is.

Income statement or profit and loss statement

An income statement shows your business's revenues and expenses over a specific period. It reveals whether you're profitable by subtracting all expenses from your total revenue.

Example calculation:

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

Cash flow statement

A cash flow statement tracks money moving 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.

3 main activities on a cash flow statement include:

• Operating activities: Daily business transactions and customer payments
• Investment activities: Buying or selling assets like equipment or property
• Financial activities: Loans, investments, and dividend payments

Statement of changes in equity

This statement is also called a statement of owner's (or shareholder's) equity, or a statement of retained earnings. It demonstrates a business's growth and performance potential by showing how much money the business keeps, instead of paying out to shareholders or owners once all costs and payments, including dividends, have been accounted for.

A business might retain earnings to repay debt, reinvest in the business, or keep a rainy day fund.

Why financial statements are important for small businesses

You'll make better financial and business decisions if you know how to read financial statements and understand your business's financial health.

Understanding your financial statements helps you make smarter business decisions. Here's how they boost your business:

• Assess financial health: See your profitability, cash flow, and equity at a glance
• Attract investors and secure loans: Prove your business is profitable and can repay debts
• Comply with tax requirements: Meet reporting rules, such as the New Zealand International Accounting Standard 1 (NZ IAS 1) – Presentation of Financial Statements, and meet your tax obligations confidently
• Track business performance: Identify trends and opportunities for growth
• Manage cash flow: Ensure you have enough money for expenses and payroll
• Make informed decisions: Use accurate data to guide strategic business choices

How to use financial statements to analyse your business

The different types of financial statements help you assess and manage your business's finances and support accurate financial reporting so you comply with tax rules.

Analyse financial performance with the income statement

The income statement helps you analyse your business performance in three key ways:

• Evaluate profitability: See whether your business generates profit or losses
• Monitor expenses: Identify overspending and opportunities to reduce costs, especially when certain expenses like salaries are significantly higher than an industry benchmark of 20–25 per cent of revenue
• Track growth trends: Compare periods to spot revenue patterns and margin changes

You can use information from the income statement to work out gross profit, operating income, and net income – figures that show whether you need to adjust prices or reduce costs to improve profitability.

Manage assets and plan for growth with the balance sheet

The balance sheet helps you manage assets and plan for growth in three ways:

• Assess liquidity: Compare current assets to current liabilities to ensure you can pay bills
• Evaluate solvency: Check long-term financial stability through debt-to-equity ratios
• Track asset management: See how efficiently your assets generate revenue

You use your balance sheet to calculate liquidity and solvency ratios like the current ratio, quick ratio, and debt to equity ratio, which show how much cash your business has to pay its bills.

The cash ratio liquidity formula helps you figure out if you have enough cash to cover payroll, expenses, and loan payments in the coming year.

The quick ratio measures whether you can cover your core costs over the next 3 months.

The current ratio formula, unlike the quick ratio, includes your business's inventory value (from your balance sheet). Use the current ratio to make decisions about your expenses and cash on hand.

Manage your cash flow with the cash flow statement

A strong cash flow means your business can meet its financial obligations. The cash flow statement shows how strong your cash flow is, so you can improve it if you need to.

Use your cash flow statement to manage your business's liquidity:

• Analyse operating cash flow: Ensure daily operations generate enough cash to sustain your business
• Judge investment quality: Track spending on equipment and expansion for future growth
• Monitor financing activities: Review how loans and external funding affect your cash position

For support in your area, check your local accounting standards, as there are different accounting requirements for various entity types and tiers.

Analyse growth with the retained earnings statement

This statement is useful for showing your business:

• Growth potential: If your business's retained earnings grow from one financial period to the next, it suggests your business can comfortably retain profits and reinvest in itself without borrowing, perhaps by purchasing new equipment or paying off debts
• Financial health: A decline in retained earnings suggests a business is using profits to cover losses or debts – a signal to review your costs and cash flow For example, unexpected losses due to issues like shrinkage of stock, which can amount to a significant portion of inventory value, can impact retained earnings.

Financial statement templates for your business

Creating financial statements is easier with pre-made templates. They help you (or your accountant or bookkeeper) easily create balance sheets, income statements, and cash flow statements over and over, giving you time to put back into your business.

Get started with Xero's free financial statement templates.

Ways to use your financial statements

Here are common ways your small business can use your financial statements.

Consider the big picture – not just profit

Consider the big picture when reviewing your financial performance. Focusing only on profit can leave your business financially vulnerable.

Review all three statements together for a complete view of your financial health. Looking at all three statements together helps you spot issues early, before they become serious problems.

Pay attention to your cash flow

Reviewing your cash flow statement regularly helps you avoid cash shortages, even when your business is profitable. So, check these statements to track your liquidity and make sure there's enough cash to cover short-term costs.

Know the difference between revenue and cash

Recorded revenue (from sales, for example) isn't the same thing as cash on hand – revenue you've recorded may not have hit your business's bank account yet.

Make sure you distinguish between sales (revenue) and actual cash inflows so you know how much your business can spend. Tracking accounts receivable separately will keep this distinction clear.

Analyse trends by comparing your financial statements

Compare your financial statements across multiple periods to spot patterns in revenue, expenses, and liabilities. This helps you invest in the parts of your business that are performing well and make smart choices about areas that are stalling.

Understand your financial ratios

Financial ratios are accounting tools that help you understand business liquidity, profitability, and overall financial health.

Learn how to use key financial ratios, such as the current ratio and quick ratio, so you can assess your company’s financial position and make better business decisions.

Streamline your financial statements with Xero

Your business has a better chance of success if you know how to manage your finances. Xero accounting software automates the creation of financial reports, gives you real-time insights into your business, and integrates payroll and invoicing, so your financial management is a breeze.

FAQs on financial statements

Here are some frequently asked questions about financial statements to help you put this information into practice.

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

The income statement shows whether you're profitable, while the cash flow statement shows whether you have enough money to pay bills. Profit doesn't always mean you have cash on hand – you might be profitable but still struggle with cash flow.

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

Most small businesses need the three main financial statements: balance sheet, income statement, and cash flow statement. These give you complete visibility into your financial health.

Add the retained earnings statement if you plan to reinvest profits for growth or debt reduction. Start with the core three – they'll provide the insights you need for better business decisions.

How often should I prepare financial statements?

That depends on your business needs. It's good to prepare financial statements regularly (monthly, quarterly, or annually) so you can react faster when an opportunity or problem arises.

Can I automate my financial statements?

Yes – Xero accounting software automates the creation of financial statements, saving you time, reducing errors, and making it easier to comply with changing regulations, such as the new requirements for disclosure of material accounting policies.