Financial Education
Reading a balance sheet without being an accountant
Three questions are enough to understand what a balance sheet says about a business — and what it deliberately hides.
Sample content
A balance sheet is a photograph taken on a single day. It shows what the business owns, what it owes and what is left for the owners. Everything else is interpretation.
The first question is about structure: how much of what the company owns is financed by other people? A business can be profitable and still be one bank decision away from stopping.
The second question is about liquidity: can the company pay what falls due in the next twelve months with what it will actually collect during the same period? Profit and cash are not the same thing, and the gap between them explains most business failures.
The third question is about quality: what is behind the assets? Receivables that will never be collected and inventory nobody wants are recorded at full value until someone decides otherwise.
Anyone can ask these three questions. Answering them precisely is the work — and that is where an external eye is useful.