Reading the three reports.
WHAT A PROFIT AND LOSS ACCOUNT SHOWS
Revenue, costs and profit over a period.
WHAT TO LOOK AT
Revenue trend Gross margin Fixed costs Profit
WHAT A BALANCE SHEET SHOWS
What the business owns and owes at a point in time.
WHAT IT CONTAINS
- Assets: cash, amounts owed to you, stock, equipment
- Liabilities: amounts owed, loans, tax due
- The difference: what belongs to the owners
WHAT TO LOOK AT
Whether assets exceed liabilities How much is tied up in stock and receivables How much debt exists
WHAT A CASH FLOW STATEMENT SHOWS
Where cash came from and went.
WHY IT MATTERS
It reconciles profit to the change in the bank balance.
WHAT THE COMMONEST QUESTION IS
Why is there profit but no money.
WHAT THE ANSWER USUALLY IS
Stock, receivables, loan repayments, equipment or drawings.
WHAT TO CHECK IN ANY SET OF STATEMENTS
That they reconcile to the bank That receivables are genuinely collectable That stock is genuinely saleable
WHY THOSE TWO
They are where statements overstate the position.
WHAT TO ASK YOUR ACCOUNTANT
To explain anything you cannot.
WHY
They are your numbers, and you will be asked about them.
WHAT TO REVIEW
Statements monthly, not annually.
WHY
Annual statements report history you can no longer act on.
