How to prepare a financial statement the right way

Preparing financial statements is an indispensable and comprehensive task — one that you have to nail to keep your business up and running.

These statements are fundamental for assessing a company’s financial health, enabling informed decision-making, and identifying areas for growth and improvement. Financial statements also give companies of all sizes the information they need to manage expenses efficiently.

In this blog post, we’ll walk through the step-by-step process of preparing precise financial statements so you can draft and distribute these documents with confidence. Let’s get started!

5 steps to prepare your financial statements

The process of preparing financial statements begins with collecting all your financial details and organizing them into official documents. Once polished and finalized, they’re shared with key stakeholders, such as management, investors, and creditors, who use them to assess the company’s performance, cash flow, and financial health. 

Not sure where to start? We’ve got you covered. Use the following steps to guide you through the process. 

Step 1: gather all relevant financial data

Before you do anything else, you have to get your ducks in a row by compiling all relevant financial data, including sales invoices, receipts, bank statements, and expense reports. 

This step serves as the foundation of the entire process. The collected data paints a clear picture of your business’s financial standing, allowing you to uncover areas needing cost reduction and empowering you to make informed decisions.

This process might sound daunting — after all, no one likes digging through a mountain of receipts or manually entering data from expense reports — but with the right tools, it doesn’t have to be. We recommend using software that allows you to scan receipts in real time, helping you automate the entry of transaction details and minimize manual errors. 

Step 2: categorize and organize the data

Once your financial data is gathered, it’s time to sort and file. Break down the data into categories such as revenue, expenses, assets, and liabilities.

A well-organized data set streamlines the drafting process, helping you meet reporting deadlines and maintain compliance with regulatory requirements. This step ensures you're speaking the language of accounting standards, which is crucial for keeping stakeholders' trust and avoiding legal issues.

To set yourself up for success during this step, opt for a preaccounting software that categorizes your financial data continuously. Instead of waiting until the eleventh hour to manually organize your expenses, use this software to scan or upload your data automatically as it comes in. 

With the right technology on your side, you can rest easy knowing not a penny is lost or misreported.

Step 3: draft preliminary financial statements

With your data neatly categorized, it’s time to start drafting your preliminary financial statements. This involves three main statements: an income statement, a balance sheet, and a cash flow statement.

Let’s go over what you’ll need to know to draft each financial statement. 

How to draft an income statement

Think of an income statement like your company’s report card. It shows if your business has made money (profit) or lost money (loss) during a specific time. Here’s a simple way to make one:

1. List all the money coming in: This could be from selling your products or services, investments, or any other way the company makes money. This total is called Revenue.

2. Find the Cost of Goods Sold (COGS): This is the money spent to make the products or services you sell.

3. Subtract COGS from revenue: This gives you Gross Profit.

4. List regular costs: These are things like rent, utility bills, employee salaries, and advertising.

5. Subtract these costs from gross profit: This gives you Operating Income.

6. Consider other costs and gains: These include taxes, interest, and any other unusual income or expenses.

7. Figure out net income: This is what the company keeps after paying all costs and expenses. It shows the company's profitability.

TLDR: Your income statement shows if your company made or lost money. It’s basically revenue - costs = net income.

How to draft a balance sheet

A balance sheet gives you a snapshot of your company’s financial health at one moment in time. Here’s how to make one:

1. Add-up assets: These are things the company owns, like cash, inventory, buildings, and equipment.

2. List liabilities: These are debts the company owes, like bills and loans.

3. Subtract total liabilities from total assets: This gives you Shareholders’ Equity, the value belonging to the owners.

4. Make sure it balances: Total assets should equal total liabilities plus shareholders’ equity.

TLDR: Your balance sheet provides a quick overview of your financial standing. It’s basically assets = liabilities + shareholders’ equity.

How to draft a cash flow statement

The cash flow statement is like your company’s bank statement. It shows how cash moves in and out during a specific time. Here’s how to draft one:

1. Start with net income: This comes from the income statement.

2. Adjust for non-cash items and changes in working capital: Include things like accounts receivable (money owed to the company) and accounts payable (money the company owes).

3. Record cash from investing: This is money spent or earned from buying and selling investments like equipment, property, or securities.

4. Look at cash from financing: This is cash from things like issuing stocks or paying loans.

5. Add everything up: This gives you the net change in cash. Add this to the starting cash to get the ending cash balance.

TLDR: Your cash flow statement shows how cash comes in and goes out. It’s all about tracking the money flow to illustrate where your money is going and find the ending cash balance.

Once these financial statements are done and dusted, it’s time to move on to the next step. 

Step 4: review and reconcile all data

This step is all about ensuring accuracy. Review every entry and reconcile all data, matching your records with bank statements and other external documents. Double-check your math for gross profit, make sure your recorded income is right, and confirm that what you’ve written down for debts and taxes matches up. This careful validation helps prevent mistakes that could give the wrong idea about how your company is doing financially.

With Expensify integrations, your accounting and expense management software can tag-team this step to highlight any discrepancies or mismatches so you can breeze through your review and quickly find and resolve errors. 

Step 5: finalize and report

You’re almost there! Once you’ve double-checked that your statements are good to go, you’re ready to finalize the statements for reporting. Depending on the nature and size of your business, this step might involve getting them audited or reviewed by external accountants to ensure compliance with relevant standards and regulations. 

Remember, these statements act as a mirror reflecting the financial stature of your business to stakeholders, helping in securing loans, attracting investors, and making well-informed business decisions, so accuracy and integrity are key. 

Common questions about financial statements 

If you still have lingering questions about how to prepare financial statements, we can help you find the answers. Check out our FAQ below.

What’s a financial statement?

Financial statements are written records that reflect the business activities and financial performance of a company over a particular time period (often monthly, quarterly, annually, or biannually). There are three types of financial statements: income statements, balance sheets, and cash flow statements. Let’s break them down below. 

Income statement

An income statement presents a company’s financial performance over a period, detailing revenues earned and expenses incurred. On an income statement, you’ll be able to see a company’s: 

• Revenues: All income earned from business activities

• Expenses: Costs incurred in earning revenue

• Net profit/loss: The difference between total revenue and total expenses

Balance sheet

A balance sheet states a company’s assets, liabilities, and equity at a specific point in time. It is comprised of: 

• Assets: The tangible and intangible items owned by the company

• Liabilities: The financial obligations and debts owed by a company 

• Equity: The owner’s interest in the company after liabilities are subtracted from assets

Cash flow statement

A cash flow statement details the amount of cash and cash equivalents entering and leaving a company. On a cash flow statement, you’ll get a glimpse of a company’s:

• Operating activities: Cash generated/used in core business activities

• Investing activities: Cash used/earned from investments in assets

• Financing activities: Cash transactions with investors and lenders

Why are financial statements important?

Financial statements are important because they give a clear picture of how well a company is doing financially at a particular point in time. They are essential for determining profitability and guiding decision-making.

Through financial statements, companies can identify trends, manage risks, and allocate resources more effectively, making it possible for them to maintain stability and achieve long-term growth. Plus, they serve as a valuable tool for investors and lenders by helping them determine whether to invest in or lend to a business.

Overall, financial statements are foundational for making informed business decisions and ensuring the sustainable growth of a company.

Which financial statement is prepared first?

An income statement is typically the first financial statement prepared. This statement lays the groundwork for both the balance sheet and the cash flow statement, showcasing the net income from revenues and expenses, which impacts assets, liabilities, and equity. 

Can bookkeepers prepare financial statements?

Yes, bookkeepers can (and likely will) prepare financial statements. A bookkeeper prepares your accounts and documents daily financial transactions, so preparing these statements would fall naturally within their scope of work. 

Unlock financial clarity with Expensify 

Preparing financial statements the right way is like piecing together a financial jigsaw puzzle. Each piece and step must be meticulously worked on to reveal the bigger picture of your business's financial health. 

No matter what the puzzle looks like when it’s done, Expensify is here to be your co-pilot on this financial journey. With expense reporting features designed to streamline and simplify, Expensify makes the process less daunting, freeing up your time to focus on what you do best — running your business.