Balance Sheet? Cash? Profit?


Balance Sheets, Cash flow forecasting/management and Profit can all seem rather confusing when one first comes across these items in real life situations, they certainly were for me.  I wash;t exposed to such financial reports until relatively recently in my career.  I had some experience through study / reading etc but never in real life for real decision making.

I thought it an idea to jot down some basics for anyone who’s interested but afraid to ask for fear of looking inadequate (for the record, I think one should always be able to ask any questions of their manager or senior management.  If questions are subdued or evaded one must wonder why and do you really want to be there?)

Anyway, you probably now that all three items are different so:

A balance sheet is a financial photograph of a business at any given point in time. The formula for all balance sheet is Assets = Liabilities + Shareholders and/or Owners Equity.  So, a balance sheet unsurprisingly balances out.  Investors use balance sheets to evaluate what a company owns and owes.   I am thinking of writing a post which goes into this a wee bit more in depth.

Cash flow forecasting and management is just that, managing cash (and in my opinion, the most important financial responsibility of your CFO / FD etc..).  This is the art of identifying when and how much cash is coming in as well as managing the opposite, when and how much cash is flowing out.

You’ve probably guessed, the trick is to therefore make rue yo have more cash in than going out at any given point.  If you end up with more cash going out than you have in  you’ll need a loan / debt / some financial instrument to see you through.  Without cash, the business will die.  Cash equals solvency and is always king.  No cash means you’re insolvent.  Thats bad.  You can see why forecasting is important here.

Profit is obvious in its basic sense, i.e.:  cash in minus cash out (cost of sale, operations, expenses, taxes etc) = net profit.   Worth knowing, profit is NOT essential to running a business.  Cash is essential.  One can survive on breaking even (no profit but no loss) year after year if one wishes however, most businesses strive to make profit as that is deemed as value creation.

The most important element is cash management.  If your CFO is asking you to amend payment terms, this is why.  The CFO’s job is to keep cash in the business for as long as possible (whilst balancing the commercial reality of building relationships with parters).

Good luck.  It’s not as daunting as it seems the more familiar you become.


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