What does a financial statement include?

Financial statements are structured records of financial activity and financial position. The main set includes a balance sheet, income statement, cash flow statement, and statement of changes in equity. The financial statement overview describes these reports and their purposes.

Ask your bookkeeper for the complete set available for your business, with clear dates and labels. Request the previous comparable period too. If a report is provisional, ask which entries still need checking before you rely on it.

These distinctions follow the definitions of the four statements. Match each file you receive to its purpose before comparing numbers.

Check what the dates mean

A balance sheet describes a point in time; the other statements describe activity over a period. The overview explains this timing distinction. Compare periods of equal length and add a note for closures, seasonal campaigns, or other events you want your accountant to consider.

What does a balance sheet show about your business?

Read its assets, liabilities, and equity as separate groups. In plain language, these describe business resources, obligations, and the owners' interest in the business. The SBA introduces the balance sheet as a snapshot for tracking these groups.

Do not stop at the total. Ask what sits inside each large balance and what document supports it. For amounts customers owe, request a list showing the customer, amount, and expected payment date.

A practical reading checklist

• Ask whether the cash balance has been checked against bank and cash records.
• Review unpaid customer amounts individually.
• Request the list behind the inventory balance.
• Ask when outstanding business obligations fall due.
• Get a plain explanation of changes in owners' equity.

Hypothetical example: a small homeware shop is considering another stock order. Before approving it, the owner asks to see the existing inventory list, available cash, and upcoming payments together. Use this as a review exercise, not as evidence that a particular purchasing decision will succeed.

Write down which answer would change your decision. You might require confirmation of a customer's payment date before committing to an order. Carry that question into a weekly cash flow review.

How do you read a profit and loss statement?

Start with revenue, work through expenses, and finish with the reported profit or loss. An income statement describes income, expenses, and profit over a stated period. The income statement definition provides that foundation.

Choose the lines with the largest unexplained changes. Ask what happened, which records support the explanation, and whether management expects the cause to continue. Keep the recorded result separate from expectations about next month.

Ask useful questions about expenses

• What does this expense category include?
• Has anything moved between categories since the previous report?
• Which items need a separate explanation?
• Who can confirm the underlying transaction?
• What decision should follow once the explanation is verified?

Hypothetical example: a design studio sees higher revenue but is unhappy with the final result. The owner asks the bookkeeper to explain contractor spending and other changed expenses before deciding what to adjust. No improvement is assumed; the next step depends on the records.

If that review identifies spending to reconsider, use a small business cost review. If pricing needs attention, prepare a separate service cost calculation before using the guide to raising prices.

Confirm the accounting method

Under accrual accounting, a sale and its payment can appear at different times; cash accounting records the sale when payment is received. The SBA explains the difference between these methods. Ask your bookkeeper to show how one actual transaction appears in your reports.

What should you check in the cash flow statement?

Look at cash movements by activity before interpreting the overall change. A cash flow statement separates operating, investing, and financing activities. The cash flow statement description identifies these three categories.

For each substantial movement, ask what transaction caused it and where its supporting record is stored. Have the accountant explain unfamiliar classifications using your own business transactions. Avoid guessing from a shortened account label.

Trace one transaction across the reports

Hypothetical exercise: your consulting business finishes a project, but the client pays later. Ask the bookkeeper to show when the work appears as revenue, where any unpaid amount appears, and where the eventual receipt is recorded. Confirm the treatment under your accounting method.

Then prepare a separate list of upcoming payments and expected receipts. Label uncertain dates as uncertain. Assign someone to confirm them, and use your business banking arrangements as another review point if records are difficult to gather.

How can you prepare and review the reports each month?

Agree on a simple routine with whoever maintains your books. Set a document deadline, a review date, and a named person for unresolved questions. Ask for a short explanation of significant changes alongside the reports.

The SBA identifies receivables, payables, available cash, bank reconciliation, and payroll as accounting tasks that need an owner. Bank reconciliation means checking accounting records against bank records. Use the SBA accounting checklist when assigning responsibilities.

Your first review agenda

1. Confirm the reports cover the intended business and period.
2. Ask which figures remain provisional.
3. Review revenue, expenses, and the final result.
4. Check cash, unpaid customer amounts, and obligations.
5. Choose the changes that need investigation.
6. Record the next action, owner, and follow-up date.

For your working sheet, use columns for the current amount, comparison amount, explanation, and action. Start with the figures you can connect to a decision. Ask your accountant to explain any proposed ratio before adding it to the sheet.

Keep a short decision log after the meeting. Write what you approved, what remains open, and which evidence you still need. At the next review, begin with those unfinished questions before adding new ones.

Why do investors look at financial statements?

Prospective investors use financial statements to assess whether investing in a business is viable. Owners and managers also use them to support business decisions. The overview of statement users explains these purposes.

Before an investor meeting, assemble reports covering consistent periods and prepare explanations for major movements. Flag incomplete information. Separate recorded performance from forecasts and state the assumptions behind those forecasts.

Rehearse explaining the business without relying on accounting jargon. If you cannot explain a balance, add it to your accountant's question list. Continue your preparation with the small business investor guide.