Question 1

What do the three financial statements actually tell you?

Accepted Answer

Each answers a **different question**, and reading any one alone gives a misleading picture — which is exactly why there are three.

**The profit and loss account (income statement).** *Did we make money over this period?*

Covers a **period** — a month, quarter or year. Starts with revenue, subtracts cost of sales to give gross profit, subtracts overheads to give operating profit, then interest and tax to give net profit.

Its limitation is that it follows **accrual accounting**: income and costs are recorded when earned or incurred, not when money moves. So it can show a healthy profit while the bank account is empty.

**The balance sheet.** *What do we own and owe, right now?*

A **snapshot** at a single date, not a period. Three sections that must balance:

**Assets** — what the business owns. Split into **current** (cash, stock, money owed by customers — expected to convert within a year) and **non-current** (property, equipment, intangibles).

**Liabilities** — what it owes. Also split current and non-current.

**Equity** — assets minus liabilities. What belongs to the owners.

The accounting equation — **assets = liabilities + equity** — is why it balances, by construction rather than by achievement.

**The cash flow statement.** *Where did the money actually go?*

Covers a period and reconciles profit to the change in cash, split three ways:

**Operating** — cash from trading. The most important line in the whole set. A business whose operating cash flow is persistently negative while reporting profits deserves scrutiny.

**Investing** — buying and selling assets.

**Financing** — loans raised or repaid, capital invested, dividends paid.

**How they connect.** Net profit from the P&L flows into equity on the balance sheet; the change in cash on the cash flow statement matches the change in the cash line on the balance sheet. They are three views of the same events.

**What to read first:** operating cash flow, then the trend in gross margin, then whether receivables or stock are growing faster than sales — the classic early warning.

General information, not financial advice.

Question 2

What is the difference between revenue, profit and cash flow?

Accepted Answer

They measure three different things, and a business can be strong on one while failing on another — which is why profitable companies go bust. Revenue (turnover). The total value of sales in a

Question 3

What is EBITDA, and why is it criticised?

Accepted Answer

Earnings before interest, tax, depreciation and amortisation. It strips four things out of profit to give a figure intended to show operating performance independent of financing and accounting

Question 4

What records must a business keep, and for how long?

Accepted Answer

Enough to support every figure in your accounts and tax returns, kept for a statutory minimum period that varies by record type and jurisdiction — and the burden of proof is on you, not on the

Question 5

What are management accounts, and how are they different from statutory accounts?

Accepted Answer

Statutory accounts are prepared to a legal standard, once a year, for filing and for tax. Management accounts are prepared for you, as often as you need them, in whatever form actually helps you

Question 6

What is the difference between cash and accrual accounting?

Accepted Answer

When a transaction is recorded. Cash accounting records it when money moves; accrual accounting records it when the economic event happens, regardless of payment. Cash basis. Income is recorded when

Question 7

Why do you need a separate business bank account?

Accepted Answer

For limited companies it is effectively a necessity because the company's money is legally not yours. For sole traders it is not usually a legal requirement and is still the single highest-return

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