Sample frameDay 038·Finance · Statements

Good morning. The P&L says how the year went. The balance sheet says whether you'd survive a bad one.

Finance.

Reading a Balance Sheet

5 min read·Apply by lunch

The question

If your largest customer started paying ninety days late this week, do you know — not sense, know — how many months your balance sheet could carry the gap, and if you don't, why haven't you given it the five minutes a lender would give it before deciding whether to back you?

The idea

Double-entry bookkeeping was codified in Venice in 1494 by Luca Pacioli, a Franciscan friar and mathematician, and the balance sheet is its oldest product: every asset a business owns is balanced by a claim on it — a liability owed to someone else, or equity left to the owners. Where the P&L is a film of the year, the balance sheet is a photograph taken on one date: what you own, what you owe, and what remains. The trap is that operators read the flattering document and skip the honest one — reported profit can be shaped by accounting choices, while cash, receivable ageing and debt maturities cannot. Businesses rarely die of a bad P&L; they die of a balance sheet nobody read: receivables ageing quietly, debt maturing in the same quarter, equity too thin to absorb one bad year. Five minutes a month is enough to catch all three.

The framework

01
Start with cash — and turn it into months.
Find cash and equivalents, divide by your average monthly operating outflow, and you have months of survival if revenue stopped tomorrow. Then compare the figure with the same line one quarter ago, because direction matters more than level — six months of cover that was nine last quarter is telling you something the P&L will not. A lender does this inside the first minute; the operator should not be the last person in the room to know it.
02
Read receivables as promises, not money.
Receivables are revenue you have recognised but not yet collected — promises with a due date, some of which will be broken. Pull the ageing: how much sits past 60 days, how much past 90, and which single customer accounts for the largest share. A widening gap between what you bill and what you bank is the classic early warning, either of a customer in trouble or of your own collections discipline slipping; if you carry stock, apply the same scepticism, because inventory that has not moved in six months pays no wages.
03
Read debt by its dates, not its total.
The amount you owe matters less than when it falls due: a modest facility maturing in ninety days is more dangerous than a large one maturing in five years. Find current liabilities — everything due within twelve months — and set the figure against the cash and genuinely collectable receivables you hold. If the first number outweighs the second, the balance sheet is telling you to open the refinancing conversation now, while you can still hold it from strength rather than necessity.
04
Treat equity as the shock absorber it is.
Equity is not a valuation of the business; it is arithmetic — assets minus liabilities, the residual left to the owners, and the buffer that absorbs a bad year before your creditors do. Ask one question of it: if your largest customer defaulted or a fifth of the stock had to be written off, would equity take the hit, or would you cross into owing more than you own? Running thin equity can be a legitimate choice, but it must be a choice made knowingly — not a condition discovered under stress.

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