How to read a financial statement without training

Three pages, six numbers. Once you know which six, you can read any set of accounts, your own or somebody else's, in about four minutes.

An open accounts page beside a magnifying glass, a pencil and a stack of coins

Skill, not jargon6 min readAnyone holding a payslip, a set of company accounts, or a statement from an accountant they did not follow.

The short answer

A profit and loss shows what happened over a year. A balance sheet shows what you own and owe on one single day.
Cash and profit are not the same thing. A business can be profitable and still run out of money.
Find six numbers: sales, gross profit, net profit, cash, what you owe, and what you are owed. Everything else is detail.

Pages that matter

Three

Profit and loss, balance sheet, cash flow

Numbers to find

Six

The rest is supporting detail

Most common trap

Profit is not cash

Unpaid invoices count as sales

Do it in this order

1Start with sales, sometimes called turnover or revenue. This is everything that came in from customers before any cost.
2Take off the direct costs of what you sold. What is left is gross profit. If that slice is thin, no amount of cost cutting elsewhere saves you.
3Take off the running costs: wages, rent, software, insurance. What is left is net profit, and that is the figure tax is charged on.
4Now turn to the balance sheet and find cash. Compare it with what you owe in the next few months. That gap is the only thing that ever closes a business.
5Find debtors, the money customers owe you, and creditors, the money you owe. If debtors are large and cash is small, you are lending to your customers for free.
6Last, read the notes. That is where the accountant explains anything unusual, and where an inspector looks first.

Only if you want the detail

Your payslip is a tiny financial statement

Gross pay is your sales. Deductions are your costs. Net pay is what actually lands. Read it in that order and it stops being a wall of codes.

The four questions that read any set of accounts

Ask these in order and you will spot most problems before an accountant explains them.

Words that sound complicated and are not

The jargon is mostly plain ideas with old names.

What people get told, and what is true

A profitable business is a safe business.

Profit can sit in unpaid invoices. Businesses close with a profit on paper and nothing in the bank.

Only accountants can read accounts.

Six numbers and four questions cover most of it. The accountant is for the judgement, not the reading.

The bottom line is the whole story.

One good year can hide a falling margin. Always compare with last year.

Now do it on your numbers

Reading is the easy half. The saving comes from applying this to your income, your country and this tax year, with the deadline written down.

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Where this comes from

General guidance, not personal advice. Anything involving a company, a trust or another country should be checked by a qualified accountant or tax adviser before you act.