Financial statements show a business’s income, costs, resources, and obligations. They give you facts you can act on. When you understand these documents, you gain the insight to judge performance, guide plans, and spot issues before they grow.
This guide walks you through each statement and links everything to financial statement analysis so you can read numbers with confidence and use them to support decisions, growth, and clarity.
Need help with your business’ financial statements? Get in touch with PLCO now!
What Are Financial Statements?
Financial statements are formal reports a business prepares to show what it owns, what it owes, what it earns and spends, and how value flows over time. They offer a clear picture of financial health.
Who Needs Them And Why
- Business owners and directors use financial statements to gauge performance, cash health, and value.
- Investors and lenders rely on them to assess creditworthiness and potential returns.
- Regulators, tax authorities, and auditors use them to verify compliance and accuracy.
- Managers use them to plan operations, manage costs, and make strategic decisions.
When And How Often They’re Reviewed or Audited
- In many jurisdictions, and under ACRA rules in Singapore, companies must prepare financial statements at the end of each financial year.
- In Singapore, unless a company qualifies for audit exemption, it must also undergo an annual statutory audit.
- The audit must be completed and the audited financial statements, along with the auditor’s report, submitted before the company’s Annual General Meeting (AGM) and annual return filing.
Who Carries Out the Review or Audit
- Only qualified individuals or firms registered with ACRA as public accountants (or approved audit firms) may perform statutory audits.
- Auditors must be independent and follow the auditing standards set under the local regime (e.g. Singapore Standards on Auditing, derived from international standards).
The Core Financial Statements
Financial statements form the foundation of financial statement analysis. Each statement shows a different side of the business, and together they provide a complete view of performance, stability, and growth potential.
Income Statement
The income statement tracks a company’s earnings and expenses over a period, usually monthly, quarterly, or annually. It answers the question: Is the business making a profit?
Key components include:
- Revenue (Sales): Total money earned from providing products or services.
- Cost of Sales (COGS): Direct costs of producing goods or delivering services.
- Operating Expenses: Overheads like salaries, rent, utilities, and marketing.
- Taxes and Interest: Obligations to the government and lenders.
- Net Profit: The final earnings after all costs are deducted.
Why it matters:
- Reveals profitability trends and areas of high cost.
- Helps identify opportunities to improve margins.
- Key metrics like gross profit margin and net profit margin guide financial statement analysis and benchmarking.
Balance Sheet
The balance sheet provides a snapshot of what the business owns, owes, and the owners’ stake at a given point in time.
Key components include:
- Assets: Resources controlled by the business (cash, inventory, equipment, receivables).
- Liabilities: Obligations the business must pay (loans, accounts payable, taxes).
- Equity: Value remaining for owners after liabilities are subtracted from assets.
Key principle: Assets = Liabilities + Equity
Why it matters:
- Indicates liquidity and ability to meet short-term and long-term obligations.
- Shows how resources are financed, through debt or owner investment.
- Supports financial statement analysis by highlighting trends in debt, equity, and asset growth.
Cash Flow Statement
The cash flow statement shows how cash moves in and out of the business. It differs from the income statement because it focuses solely on cash, not accounting profit.
Sections:
- Operating Activities: Cash generated or spent in everyday business functions.
- Investing Activities: Cash used for or gained from buying/selling assets.
- Financing Activities: Cash from loans, repayments, or owner contributions/dividends.
Why it matters:
- Tracks the business’s ability to meet obligations.
- Highlights cash shortages or surpluses.
- Essential for financial statement analysis, as a profitable business may still face liquidity issues.
How These Statements Work Together
Financial statements tell different parts of the story, but together they give a complete picture of a business’s health. Reading them together is the heart of financial statement analysis.
Profit vs Cash
Profit shown on the income statement does not always mean the business has cash in the bank. Revenue may be earned on credit, and expenses may be paid later. The cash flow statement shows the real movement of money and highlights potential shortfalls or surpluses.
Assets and Liabilities
The balance sheet shows a snapshot of the company’s assets and the debts it is responsible for. Comparing it with the income statement helps assess how efficiently assets generate revenue and how liabilities affect profitability.
Rising debt may indicate growth or stress, depending on cash flow and profit trends.
Trends and Patterns
Analysing statements over multiple periods reveals trends. For example:
- Increasing revenue but falling cash flow signals potential collection issues.
- Rising assets but declining equity suggests over-reliance on debt.
- Shrinking profit margins with stable revenue indicates rising costs.
- Making Connections
By linking the three statements:
- Income statement → shows performance
- Balance sheet → shows position
- Cash flow statement → shows liquidity
You can see the full story on what is earned, what is owed, and what is available. This approach allows better forecasting, risk assessment, and strategic planning.
Why You Should Analyse Financial Statements
Financial statement analysis is the process of reviewing financial statements to understand a business’s performance, stability, and growth potential. It turns numbers into insights you can act on.
- Interpreting Trends Across Multiple Periods
When you line up financial statements across several periods, you begin to see how the business is moving. Patterns form around revenue growth, expense control, profit stability, and cash flow strength.
These movements show whether the business is gaining momentum, slowing, or holding steady. Trends give you early signals, which is why reviewing several periods together builds a clearer picture than looking at a single report.
- Comparing Performance Against Industry Benchmarks
Once trends are visible, the next step is to compare the business with others in the same field. A profit margin may look healthy on its own, yet it might fall below the industry average.
A liquidity ratio may seem weak but could be typical for the sector. Benchmarks add context, helping you understand whether performance is competitive or lagging. They turn isolated figures into meaningful comparisons.
- Connecting Numbers with Real Business Conditions
Numbers gain meaning when you relate them to what’s happening in the business environment. A rise in costs may link to supplier changes.
A decline in cash flow could reflect slower customer payments. Growing debt might support planned expansion or signal financial pressure. Each figure tells part of a story, and connecting them to real circumstances turns data into insight.
- How Analysis Guides Decisions and Strategy
Once the picture is clear, the numbers start guiding decisions. You can refine pricing, manage costs with intention, strengthen cash flow routines, or decide whether a new loan aligns with the business’s financial position.
Analysis becomes a steady support for planning, helping each decision rest on evidence rather than assumption.
Conclusion
Understanding financial statements takes practice, but it gives you control over business decisions. By reading the income statement, balance sheet, and cash flow statement, and applying financial statement analysis, you can spot trends, assess stability, and plan with confidence.
Need help with your business’ financial statements? Get in touch with PLCO now!
