4 Types of Financial Statements That Every Business Needs (2024)

If you're a small business owner, you may be thinking that your accountant is the only person who could possibly be interested in your business's financial statements.

But if you're looking for investors for your business, or want to apply for credit, you'll find that four types of financial statements—the balance sheet, the income statement, the cash flow statement, and the statement of owner's equity—can be crucial in helping you meet your financing goals.

What is a financial statement?

A financial statement is a formal record of a business’ financial condition and activities. These documents describe the business’ performance, cash flow, and overall economic health over a specified period.

Here’s what you should know about financial statements:

• They disclose relevant financial information to investors, creditors, and regulatory bodies.
• Companies typically prepare financial statements quarterly and annually.
• The statements should adhere to generally accepted accounting principles (GAAP) or international financial reporting standards (IFRS).

Although the purposes of each type of statement vary, business owners and external stakeholders use them to make informed decisions, ensure regulatory compliance, and plan for the future.

Understanding the 4 types of financial statements

It's important for the small business owner to understand these four types of financial statements and the information they provide for the investor or creditor interested in providing funds for your business.

1. Balance sheet: Assets, liabilities, and equity
2. Income statement: Revenues, expenses, and resulting net income or loss
3. Cash flow statement: The inflow and outflow of cash and cash equivalents
4. Statement of owner’s equity: Changes in the ownership interest of a business

Both individually and taken together, these financial statements give a potential investor or creditor a wealth of information and can have a serious impact on your business's ability to obtain the funds or financing it needs.

1. Balance sheet

Also known as a statement of financial position, or a statement of net worth, the balance sheet is one of the four important financial statements every business needs.

Key components of a balance sheet include the following:

1. Assets. Resources the company owns that have economic value, categorized as:
   • Current assets such as cash, inventory, or money owed to the company
   • Non-current assets such as property, vehicles, or equipment
2. Liabilities. The business’ debts and financial obligations, both short-term (current) and long-term (non-current), such as staff payroll, vehicle loans, or mortgages.
3. Equity. The owner’s stake in the business, calculated as the difference between assets and liabilities. It represents the value that would be returned to the business owner(s) if all assets were liquidated and all debts paid off.

Based on the basic accounting equation, or balance sheet equation [Assets = Liabilities + Equity], the balance sheet provides a snapshot of a business's assets, liabilities, and equity.

It also provides users with a look at the business's financial position at a specific point in time, and financial statement analysts use the information it contains to calculate several important financial ratios.

Balance sheet example

To understand what this type of financial statement looks like, you can reference a quarterly balance sheet prepared by Deluxe Home Furniture, a hypothetical company, as an example:

1. Total assets: $459,745
   • Current assets: $284,491
   • Non-current assets: $175,254
2. Total liabilities: $291,839
   • Current liabilities: $276,097
   • Non-current liabilities: $15,742
3. Total stockholders’ equity: $167,906

Based on the balance sheet equation, the total liabilities and stockholders’ equity would be $459,745 as of the date above, or the same as the total assets.

2. Income statement

The income statement is another important financial statement for your small business. It provides users with a picture of the business's financial performance over a specific period of time.

Also known as a statement of revenue and expense, or a profit and loss statement (P&L), the income statement is a statement of earnings that shows a business's operating and nonoperating revenue and expenses.

Like the balance sheet, the information contained in an income statement is used in financial statement analysis to calculate financial ratios that provide users with further insight into a business's financial performance. Here are the typical categories you’ll see on an income statement:

• Revenue: The total amount of money earned from sales of goods or services.
• Cost of revenue or goods sold (COGS): Direct costs associated with producing goods or delivering services.
• Gross profit: The difference between revenue and COGS.
• Operating expenses: The routine costs of operating the business, such as rent and utilities.
• Operating income: The profit earned from core business operations (gross profit minus operating expenses).
• Non-operating revenue and expenses: Income and costs not directly related to business, such as interest payments.
• Net income: The final profit after all expenses are deducted, commonly known as the “bottom line.”

Unlike the balance sheet, however, the income statement covers an extended period (month, quarter, or year) rather than a specific point in time.

Income statement example

Here are the main takeaways from Deluxe Home Furniture’s income statement published in the same hypothetical quarterly report:

• Revenue: $174,214
• Cost of revenue: $68,384
• Gross profit: $105,830
• Operating income: $5,055
• Non-operating revenue and expenses: $2,919 (includes interest expense, interest income, and other income)
• Net income: $4,744

3. Cash flow statement

The cash flow statement, also known as a statement of cash flows, or a statement of changes in financial position, is an important financial statement that gives users an understanding of how well a business is managing its cash flow.

Using the information in a cash flow statement, users are able to see whether a business is generating sufficient cash to meet both its debt obligations and its operating expenses.

The typical cash flow statement format provides information about a business's cash from operating activities, cash from investing activities, and cash from financing activities.

Here’s what each category means:

• Operating activities: Cash generated from core business operations.
• Investing activities: Cash flows related to the purchase or sale of long-term assets, such as equipment or securities.
• Financing activities: Cash flows that affect the company’s capital structure, including repaying loans or repurchasing stock.

This statement can reveal cash flow problems that might not be apparent from the income statement alone. A business can be profitable on paper but still face cash shortages if, for example, it must make a large investment in new property or customers are slow to pay invoices.

Cash flow statement example

Deluxe Home Furniture reported the following figures in its cash flow statement for the period ending on March 31, 2024:

• Net cash provided by operating activities: $34,194
• Net cash used in investing activities: -$9,477
• Net cash used in financing activities: -$22,271

4. Statement of owner's equity

The fourth financial statement that a business needs is a statement of owner's equity, also known as a statement of changes in equity, or a statement of shareholders' equity.

It shows the business's retained earnings—the profit kept, or retained, within a business rather than distributed to owners or shareholders—both at the beginning and at the end of a specific reporting period.

Retained earnings are often used to either reinvest in the company, or to pay off the business's debt obligations. It provides users with information regarding the financial health of a business, as it shows whether the business is capable of meeting ongoing financial and operating obligations without requiring its owners to contribute more capital.

Statements of owner’s equity typically include these elements:

• Beginning balance of owner’s equity
• Net income or loss for the period
• Owner investments or capital contributions
• Withdrawals or distributions to owners
• Ending balance of owner’s equity

It’s worth noting that companies may include additional or different line items based on their organizational structure and business needs.

Statement of owner's equity example

Some notable findings from Deluxe Home Furniture’s statement of stockholders’ equity include these figures:

• Beginning balance: $168,834 (as of December 31, 2023)
• Stock-based compensation awarded to employees: $16,273
• Repurchased common stock: $12,759
• Ending balance: $167,906 (as of March 31, 2024)

Despite earning a profit, stock repurchases and stock-based compensation impacted the company’s equity, resulting in a slight decrease in stockholders’ equity for the period.

Financial statement benefits

While preparing financial statements can be tedious, they offer numerous advantages for businesses of all sizes.

Here are five benefits to consider:

• Performance evaluation and trend analysis. Financial statements allow you to assess your business’ performance over time and identify patterns that can influence future decisions.
• Attracting investors and securing loans. Detailed financial statements demonstrate your business’ potential, making it easier to secure private investments or loans from financial institutions.
• Asset and liability tracking. These documents give you a clear picture of what your business owes and owns, helping you manage your company's assets and plan for future needs.
• Cash flow management. By analyzing your cash flow statement, you can better understand and control the movement of money in and out of your business.
• Compliance and legal requirements. Accurate financial statements help you meet regulatory requirements, calculate income tax payments, and maintain good standing with government agencies and other stakeholders.

Regular review and analysis of a business’ financial statements are essential practices for any owner who wants to position themselves for long-term success. If you need assistance preparing or understanding your business’s financial statements, you might consider contacting an accountant or a business lawyer.

How to read financial statements

As you begin to review and create financial statements, keep these points in mind to extract useful insights:

• Compare periods. Examine financial statements from multiple periods to identify changes in your company's financial performance.
• Use ratios. Financial ratios, such as debt-to-equity ratio and profit margin, can offer quick insights into your business’ profitability, liquidity, and efficiency.
• Context matters. Consider external factors that might influence financial results, such as economic conditions, industry trends, or seasonal fluctuations.
• Ask questions. If something doesn’t make sense, don’t hesitate to ask your accountant or financial advisor for clarification.

By preparing each of these financial statements, not only will you be able to provide a prospective investor or creditor with important information that they need to assess your business, but also you will be able to identify trends in your business's performance that will help you to position your business for continued success.

You can work with your accounting professionals or engage an online service provider to help ensure that your business is compliant with its reporting and obligations throughout the year.

FAQs

How do I make a financial statement?

Start by maintaining accurate records for all financial transactions. You can use accounting software or spreadsheets to organize the data into the appropriate format for the statement you wish to create. If you have concerns, it’s worth asking an accountant for assistance to get it right.

How frequently should I prepare financial statements?

Most businesses prepare quarterly and annual financial statements, but some may opt for monthly statements. The frequency ultimately depends on regulatory requirements, investor expectations, or loan terms.

How do financial statements comply with accounting standards?

Generally speaking, compliance involves following GAAP in the U.S. or IFRS internationally. These standards provide guidelines for recognizing, measuring, and reporting financial information. You’ll also want to adhere to specific rules for different types of transactions and accounts, so consider consulting a financial professional for help.

How are financial statements interrelated?

Financial statements demonstrate a company’s financial health but from different perspectives. For instance, the income statement’s net income affects the equity statement, which, in turn, impacts the balance sheet. Likewise, the cash flow statement demonstrates income with actual cash flow movements.

Belle Wong, J.D. contributed to this article.