The difference between the two
The balance sheet lists what you own and what you owe on the last day of the financial year. The income statement traces what happened over the twelve months: income on one side, expenses on the other, the result in the middle.
Reading a balance sheet
Side
Assets
- Content
- Fixed assets, inventory, receivables, bank
- Question to ask
- What does the company have?
Side
Liabilities
- Content
- Equity, loans, debts
- Question to ask
- What money was it financed with?
| Side | Content | Question to ask |
|---|---|---|
| Assets | Fixed assets, inventory, receivables, bank | What does the company have? |
| Liabilities | Equity, loans, debts | What money was it financed with? |
The two columns are equal by construction. If equity turns negative, the company owes more than it owns — that is the main warning sign.
Reading an income statement
Read it from top to bottom. Revenue minus purchases equals the margin. Minus external costs and staff, it equals the operating profit — the only figure that tells you whether the business itself is profitable.
The four figures to look at
- Operating profit — how profitable the business is, before financing.
- Equity — the strength built up over time.
- Net cash — what is really available.
- Customer payment time — the leading cause of cash strain.
The classic trap
A profitable year with falling cash is common, and perfectly logical: profit is an accounting figure, cash is real. An invoice issued but not yet paid is income without any money coming in.