M32ManageFinance· Module 1
Reading the Financial Statements
The accountant sends the accounts. The founder files them without being sure what they say.
- Start
- Manage
- Finance
- ~5 min · Checklist
The business problem
Many founders treat financial statements as a compliance requirement prepared for tax and the bank. They rely on the bank balance to judge performance and cannot explain to a lender or partner how the business is really doing.
Why it matters
The three statements together show performance, position and cash. Reading them fluently lets you spot trouble early, talk credibly to banks and investors, and hold your finance team to account.
What you will learn
- Read the income statement: revenue, costs, margins and profit
- Read the balance sheet: what the business owns, owes and is worth
- Read the cash flow statement: where cash came from and went
- Connect the three statements to each other
Core questions
- What is our gross margin and how has it moved?
- How much is tied up in receivables and stock?
- Did our operations generate or consume cash last year?
- What does the business owe, and when?
Work through the module
CaseWhat is happening?
Family-owned hardware store, 20 people · Illustrative teaching case
A hardware store owner applies for a bank loan to expand. The bank asks why profit rose but cash fell, and why receivables doubled. The owner cannot answer. Working through the statements with the accountant, she sees that credit sales to contractors grew rapidly and stock increased ahead of the expansion.
DecisionWhat does the leader need to decide?
Borrow on the strength of profit, or first understand and address what is absorbing the cash?
FrameworkHow should they think about the problem?
Three statements, one story
The income statement shows performance over a period. The balance sheet shows position at a point in time. The cash flow statement reconciles the two: profit, adjusted for changes in receivables, stock, payables and investment, equals the change in cash.
ToolWhat can they use?
Statement reading checklistChecklist
- Revenue growth, gross margin and net margin
- Receivables, stock and payables vs last year
- Operating cash flow vs profit
- Debt and upcoming repayments
- Three questions to ask your accountant
ApplicationHow does it apply to their business?
Apply it to your own business:
- Take last year's accounts and complete the checklist
- Explain in one paragraph why cash differed from profit
- Agree three questions for your accountant
ImplementationWhat changes?
What should change in the business:
- Request monthly statements, not only annual ones
- Review them within ten days of month-end
- Share key figures with your management team
ReviewDid it work?
How to tell whether the change worked:
- Can you explain the statements to a lender without help?
- Are monthly statements arriving on time?
- Are decisions referencing the figures?
After this module you should be able to decide
Borrow on the strength of profit, or first understand and address what is absorbing the cash?
And leave with: The ability to read your own income statement, balance sheet and cash flow.
Sequence · Finance
Related modules
Part of these learning paths