The three statements

A company publishes its accounts every year. Three tables, and pages of notes. Everything you need to know is in there.

Take an imaginary bakery. A whole year, told by its three tables.

First table: the income statement. It tells the year. What was sold, what it cost, what is left.

It sold three hundred thousand euros' worth. Flour, wages, rent, energy: two hundred and seventy thousand of costs.

Thirty thousand euros are left. That is the profit, or net income. The number quoted everywhere.

Second table: the balance sheet. It is not a film, it is a photo. What you own and what you owe, on a given day.

On the left, assets: the oven, the premises, the stock, the money in the bank. Two hundred thousand euros in all.

On the right, liabilities: who financed all that. Eighty thousand of the owners' money, one hundred and twenty thousand of debt.

The two sides are always equal. Everything you own was paid for by someone: yourself, or a lender.

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Third table, the most honest: the cash flow statement. The money that really came in, and really went out.

Because profit is not cash in the till. Accounting counts things the bank does not see.

The oven cost fifty thousand euros, paid years ago. Accounting counts five thousand a year, for ten years.

These five thousand are a cost, but not a euro leaves this year. So they are added back to cash.

And a big customer, a restaurant, has not yet paid for its twenty-five thousand euros of bread. Sold, yes. Collected, no.

Thirty thousand of profit, plus five thousand, minus twenty-five thousand. Cash gained: only ten thousand euros.

Thirty thousand of profit, ten thousand in the bank. Both numbers are true. They do not tell the same story.

And if the restaurant goes bust? The twenty-five thousand will never come in. The profit was partly a promise.

That is why people say: profit is an opinion, cash is a fact.

That leaves the fourth part, the one nobody reads: the notes. Dozens of pages in small print.

That is where you find ongoing lawsuits, rent promised for ten years, changes in accounting method.

Bad news is not hidden. It is written down, but where nobody looks.

The income statement says what happened. The balance sheet says where you stand. Cash flows say whether the money follows.

A healthy company shows all three agreeing. Profit rising, and cash rising with it.

When the tables contradict each other, do not pick the most flattering. Go and read the notes.