# Reading financial statements

*The profit and loss account, the balance sheet and why profit is not cash.*

## Production summary

- Modules to record: 1
- Total script: 345 words, about 2 minutes of finished audio
- Voices: Amara (host) and Nadia (practice educator)
- Level: Level 2 to 3, managers and owners

## Accreditation wording that must appear in the description

- **The CPD Certification Service** (planned): Application scheduled.

> Do not upgrade any of these words in a description or a thumbnail. Aligned is not accredited, and planned is not approved.


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## Profit, position and cash, and how they differ

**Runtime** about 2 minutes. **Words** 345. **Starts at** 00:00 in the full course recording.

### Learning outcomes to state on camera

- Explain every major line of a profit and loss account
- Interpret a balance sheet, including what it omits
- Explain the difference between profit and cash
- Identify the accruals that move profit between periods

### Script


`[CUE 1]` *Profit and loss account as a funnel narrowing from revenue to profit after tax.*

**AMARA**  [00:00]
My accountant says we had a good year. My bank account disagrees loudly. Which one is lying?

**NADIA**  [00:06]
Neither, and that sentence is the reason this module exists. Profit and cash answer different questions, and a business can be excellent at one while dying of the other.


`[CUE 2]` *Balance sheet as two stacked columns that must reach the same height.*

**AMARA**  [00:18]
Explain how that is possible.

**NADIA**  [00:20]
You record a sale when you make it, not when you are paid. So if you sold well in March on ninety day terms, March looks superb. The money arrives in June, and meanwhile you have paid your supplier, your staff and your rent.


`[CUE 3]` *Timeline: sale in March, cash in June, wages every month in between.*

**AMARA**  [00:38]
So growth makes it worse.

**NADIA**  [00:40]
Growth makes it much worse, which is deeply counterintuitive. To sell more you buy more stock and you carry more unpaid invoices, and both are funded before a single customer pays you. The fastest growing business in a sector is often the one closest to running out of money.


`[CUE 4]` *Growth trap diagram: rising sales, rising stock and debtors, falling bank balance.*

**AMARA**  [00:59]
Right. Take me to the profit and loss account. What do I look at first?

**NADIA**  [01:05]
Gross margin, not the bottom line. Gross margin tells you whether the thing you sell makes money before the cost of existing. If that is falling, no amount of overhead cutting saves you, because the problem is in the price or in what it costs to deliver.


`[CUE 5]` *Items missing from a balance sheet: staff, brand, current property value.*

**AMARA**  [01:24]
And the balance sheet? It always balances, so what is it telling me?

**NADIA**  [01:29]
Rather less than people assume. It balances by construction, so the balancing is not evidence of anything. And it is a record of transactions rather than a valuation.

**AMARA**  [01:40]
Meaning what, in practice?

**NADIA**  [01:42]
Meaning your staff appear nowhere. Your reputation appears nowhere unless you bought somebody else's. Your building may be sitting at what it cost in 1994. People read a balance sheet as what a business is worth, and it is not that at all.

**AMARA**  [01:59]
So what is it good for?

**NADIA**  [02:02]
Structure. What you owe against what you own, how much falls due within the year, and how much of the business is funded by borrowing rather than by owners. Those are real and they are what a lender reads first.

### Sources for the on screen credit

- FRS 102, the financial reporting standard, Financial Reporting Council
- Companies Act 2006, part 15, accounts and reports, legislation.gov.uk
- Conceptual framework for financial reporting, IFRS Foundation

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