01Money

A profitable company goes bust when customers pay slower than suppliers demand

Under accrual accounting, a sale counts as revenue when you deliver and invoice it, not when the money lands. So a builder can book a 300,000 job as profit in March while the client pays in July. Wages, rent and materials still fall due in April. Run out of cash and the business stops, whatever the profit line says. This is why the cash flow statement exists at all.

It is the single most common way a business that looks healthy on paper fails in practice.

02Money

The cash flow statement splits money three ways: operating, investing, financing

Operating is cash from actually running the business, customers paying minus suppliers and wages. Investing is cash spent buying equipment or received from selling it. Financing is borrowing, repaying loans, issuing shares, paying dividends. Add the three and you get the change in the bank balance, a number nobody can argue with. The pattern worth checking: a company reporting healthy profit while operating cash flow is negative is funding itself from loans or asset sales.

Profit involves judgement calls; the cash section shows what genuinely arrived and where it came from.

03Money

Depreciation charges you for a purchase in years when no money leaves

Buy a delivery van for 50,000 and the cash goes out once. But the van earns its keep over a decade, so accounting spreads the cost across those years, maybe 5,000 a year. Every year after the first, profit drops by 5,000 while nothing at all moves in the bank. This is why people add depreciation back when they want to see cash. It is not money set aside to buy the next van. Nothing is being saved.

Depreciation is the biggest reason profit and cash drift apart, and it trips up almost everyone reading their first accounts.

04Money

Accrual accounting books a sale when you deliver it, not when you get paid

Say you finish a job in December and the client pays in March. Under accrual accounting, the revenue belongs to December, because that is when you did the work, and the costs of doing it get recorded in December too. Cash accounting, which is how most people think about their own money, would put the whole thing in March. Public companies use accrual. That is exactly why reported profit can exist while the bank account sits empty.

It explains why the profit figure and the money in the account describe two different moments in time.

05Money

A balance sheet shows one single day; an income statement shows a whole year

Three reports, three different questions. The balance sheet is a photograph taken on the last day of the period: what is owned, what is owed. The income statement covers the stretch between two photographs and asks whether sales beat costs. The cash flow statement covers the same stretch but tracks only money actually moving in and out of the bank. Read them together or you get a misleading picture.

Knowing which statement answers which question stops you from looking for a number in the wrong place.

06Money

A balance sheet balances because everything a company owns was paid for by someone

Two claims exist on every asset. Lenders and suppliers have first claim, which is liabilities. Whatever is left over belongs to the owners, which is equity. So assets always equal liabilities plus equity, by construction rather than by luck. A bakery with 500,000 of ovens and stock, and a 400,000 loan, has 100,000 of equity. If the ovens lose value, equity absorbs the hit.

Once you see assets as claims, you can tell instantly how much of a business the owners really hold.

07Money

Every transaction is written down twice, which is how mistakes get caught

Buy a van for 20,000 in cash and two things happen at once: a van appears among what you own, and cash drops by 20,000. Double entry bookkeeping means recording both halves of every event, so the two columns must agree at the end. If they don't, something was mistyped or missed. It won't catch a wrong number entered correctly in both places, or a deliberate lie.

It explains why accounts are built as paired columns rather than a single running list of payments.

07

That's the set.

All 7 of them. Pick another collection, or go back to today.