How to Prepare Financial Statements: 5 Essential Steps

In this article we discuss:

• Why Are Financial Statements Important?
• Essential Financial Statements for Every Business
  • Income Statement
  • Balance Sheet
  • Cash Flow Statement
  • Statement of Shareholder Equity
  • Notes to Financial Statements
• What You Need to Prepare Your Statements
• How to Operationalize Financial Statements: 5 Essential Steps

Financial statements are standard for tracking performance, but preparing them is still a challenge for many businesses. Even with modern financial management systems and access to real-time data, compiling consistent, complete statements is often a fragmented and error-prone process.

Today, 40% of CFOs say they’re not confident in their financial data, and 47% worry they’re making decisions based on incomplete or inaccurate numbers. The risks of unreliable financials are significant: late or incomplete statements can erode trust, delay action, and increase the likelihood of poor decisions with real financial consequences.

Whether you’re leading finance at a growing startup or handling reporting for an enterprise, it's essential to know how to develop statements with consistency and confidence.

Why Are Financial Statements Important?

Financial statements aren’t just for year-end reporting or investor updates. They’re central to how businesses operate day-to-day. From planning headcount to approving budgets, understanding profitability, or evaluating liquidity, statements support the full range of financial and operational decisions.

Because they follow a consistent structure, financial statements provide a shared language across teams, functions, and even external organizations. A wide range of business stakeholders depend on statements to make decisions.

• Executives: Need a clear line of sight into performance, spending, and strategic goals
• Finance teams: Rely on statements to ensure accuracy, maintain compliance, and guide budgeting
• Auditors: Use them to verify the accuracy and completeness of reported data
• Tax authorities: Require them to assess tax obligations and ensure legal compliance
• Investors and lenders: Analyze them to measure financial strength and make funding decisions

But financial statements only matter if people can use them in practice. The structure, timing, and clarity of reporting all directly affect how effectively teams can plan, act, and stay aligned. If reporting slows things down or creates more questions than answers, it’s not doing its job. To support real decision-making, financial statements need to be complete, consistent, and ready when people need them.

Essential Financial Statements for Every Business

Different financial statements provide a different lens into business performance. One tracks profit, another shows cash, another measures what the business owns and owes. Together, these five essential statements create a full, structured view of financial health that’s essential for internal planning, external reporting, and long-term decision-making.

Income Statement

The income statement shows whether the business earned a profit or incurred a loss during a specific reporting period. It captures how much revenue was generated, how much it cost to operate, and what was left over after all expenses.

Key components of the income statement:

• Revenue: Total income earned from sales or services
• Cost of goods sold (COGS): Direct costs tied to producing goods or delivering services
• Gross profit: Revenue minus COGS
• Operating expenses: Day-to-day costs like salaries, rent, and marketing
• Operating income: Earnings before interest and taxes
• Other income/expenses: Non-operational items like interest or one-time gains/losses
• Net income: Final profit (or loss) after all costs are accounted for

This statement is key for evaluating profitability, spotting cost issues, and comparing performance over time.

Balance Sheet

The balance sheet shows the company’s financial position at a specific point in time. It summarizes what the business owns, what it owes, and how much equity is left over for shareholders.

Key components of the balance sheet:

• Assets: Everything the business owns, both current (cash, receivables) and non-current (equipment, property)
• Liabilities: What the business owes to others, including short-term debts and long-term obligations
• Equity: The residual interest in assets after liabilities are subtracted; includes retained earnings and shareholder capital

This statement is used to assess liquidity, solvency, and whether the business can cover its obligations or raise capital to grow.

Cash Flow Statement

A cash flow statement shows how cash moves in and out of the business. It’s broken into three sections that explain how the business generates and uses cash—not just whether it's profitable on paper.

Key components of the cash flow statement:

• Operating activities: Cash from day-to-day business (e.g., sales, vendor payments)
• Investing activities: Cash used to buy or sell long-term assets like equipment
• Financing activities: Cash from borrowing, repaying debt, or issuing dividends
• Net change in cash: The overall increase or decrease in cash during the period

Unlike the income statement, this one focuses on liquidity—whether the business can actually pay its bills, invest in growth, or sustain itself through volatility.

Statement of Shareholder Equity

The statement of shareholder equity tracks changes in the company’s equity over time. It shows how retained earnings, stock transactions, and dividends affect the ownership value of the business.

Key components of shareholder equity:

• Common stock: Value of shares issued to shareholders
• Retained earnings: Profits held in the business rather than distributed
• Dividends: Earnings paid out to shareholders
• Additional paid-in capital: Capital received above share par value
• Other adjustments: Currency translation, stock buybacks, or revaluations

This report is especially important during audits, funding rounds, or cap table management, as it shows how ownership value evolves and what portion of profits are reinvested.

Notes to Financial Statements

Notes to financial statements are detailed footnotes that explain how the financial reports were created and what’s behind the numbers. They clarify accounting methods, define assumptions, and disclose anything that could affect how a statement is read. Examples of what you might find in notes include:

• Revenue recognition rules: When and how sales are recorded, especially for complex or multi-period contracts
• Depreciation and amortization methods: How assets are expensed over time, including useful life assumptions
• Valuation techniques: How inventory, investments, and intangible assets are measured
• Contingent liabilities: Potential future costs from lawsuits, tax issues, or contractual guarantees
• Related-party transactions: Dealings between the company and executives, subsidiaries, or affiliates
• Accounting changes and updates: Adjustments to standards or methods that impact comparability

Notes help external stakeholders trust the data they see in your statements and ensure internal teams interpret it appropriately in context when making important decisions.

Before You Begin: What You’ll Need to Prepare Financial Statements

Before you dive into building financial statements, make sure you have the right foundation. The accuracy of your reports depends on clean data, a clear accounting structure, and a consistent methodology. Without these essentials, even the most sophisticated tools can't produce reliable insights.

Here’s what you’ll need:

• Trial balance and general ledger: These are your raw materials. The trial balance summarizes all accounts and ensures debits and credits match, while the general ledger provides the detailed transactions behind every number.
• Defined accounting period and consistent methodology: Whether you’re reporting monthly, quarterly, or annually, stick to a standardized reporting period and apply accounting principles uniformly across statements.
• Financial management software: Holistic financial planning and accounting tools streamline the process by automating calculations, reducing manual errors, and providing audit-ready reports.
• GAAP or IFRS framework: Depending on your jurisdiction or reporting requirements, align your statements with the relevant accounting standards to ensure compliance and comparability.
• Clean, validated source data: Ensure your inputs are accurate and reconciled before you begin. Data issues at the source will carry through to every report you generate.

Getting organized upfront reduces risk and makes the entire reporting process smoother. With these elements in place, you’re ready to prepare statements that not only meet compliance standards—but also help your business make smarter decisions.

How to Operationalize Financial Statements: 5 Essential Steps

Once you’ve gathered your inputs, the next phase is putting structure and discipline around how your financial statements are created and maintained. Accuracy, consistency, and scalability all depend on the standards you enforce and the practices you repeat every cycle.

Step 1: Reconcile Your Data

Before you begin preparing any statement, reconcile your trial balance to the general ledger and ensure all subledgers match. Cross-check beginning balances against the prior period’s closing numbers, confirm that all journal entries are posted, and validate that your accounting reports reflect all required transactions for the reporting period. This is not the stage to fix discrepancies—those should already be resolved. If your source data is still in question, pause here until it's been reviewed and signed off.

Step 2: Standardize Your Process

Establish your reporting methodology before the close begins. Confirm which standards you’re following (GAAP, IFRS), set your reporting calendar, and communicate cutoffs to all departments. Decide in advance how you’ll treat accruals, deferrals, depreciation, and any revenue recognition nuances. Use standardized report templates, account groupings, and naming conventions to reduce confusion and ensure consistency across teams and time periods.

Document templates and policies clearly, and revisit them periodically to keep up with changes in your business or regulatory guidance. Document these policies and ensure they're applied consistently across periods. Deviations—even small ones—undermine the comparability of your reports.

Step 3: Automate Where Possible

Relying on spreadsheets or fragmented tools increases your margin for error, and according to the Workday CFO AI Indicator report, more than one-third of CFOs are dissatisfied with the number of tasks their teams still manage manually. 

Adopt a financial management system that can help you automate wherever possible, starting with journal entries, reconciliations, intercompany eliminations, and recurring close activities. Streamlining these tasks reduces the risk of error, shortens close cycles, and frees your team to focus on higher-value work.

Step 4: Validate Your Results

After your statements are assembled, don’t assume accuracy; always confirm it. Tie net income from the income statement to retained earnings on the balance sheet. Confirm that ending cash aligns between the balance sheet and the cash flow statement. Check that your notes match what’s disclosed in the core statements. Run variance analysis against prior periods and flag unexplained swings. Have at least one reviewer walk through the full reporting package end-to-end.

Step 5: Improve With Every Cycle

Each reporting cycle should be an opportunity to get faster and more accurate. Debrief with your team post-close. What caused delays? Where did errors slip through? Use those insights to update your close checklist, refine your templates, and flag systems or workflows that need to evolve. Reporting maturity doesn’t come from one perfect close, but the result of intentional iteration over time.

The businesses that excel at financial reporting treat reporting as a core capability. By institutionalizing these practices, you create statements that serve not just auditors, but strategic decision-makers across the business.

Turn Financial Reporting Into a Strategic Advantage

When they're maintained accurately and used strategically, financial statements are one of the most powerful decision-making tools your business has. Getting to that level requires discipline, alignment, and the right technology to support repeatable, scalable reporting.

Whether you’re managing a lean finance team or running a global close, investing in the right systems and standards makes your statements more timely, more accurate, and more useful to everyone who relies on them.

Finance leaders are facing increased expectations from both internal and external stakeholders. Download this report to uncover the top five reasons CFOs are moving to Workday to optimize their finance operations.