3-Statement Snapshot

Fill in a short income statement, cash flow statement and balance sheet for the same period, check that they connect, and end with four lines anyone can act on: profit, cash, biggest risk and the lever to pull.

The three statements are a reporting standard, not research (IAS 1, replaced by IFRS 18 from 2027). The cash conversion cycle is an established liquidity measure (Richards & Laughlin, 1980). Scenario planning is practice with mixed research support (Wack, 1985). The runway bands and the downside size on this page are rules of thumb.

Use it when:

• You run a business or a unit and want one honest view of profit, cash and what you own and owe.
• Profit looks fine but the bank balance does not, and you want to see where the cash goes.
• You are preparing for a bank meeting, a board, an investor or a big spending decision.

Skip it when:

• You only need to read someone else's annual report: use the questions in "Optional: Reading Statements You Did Not Build" at the end of this page.
• You need a monthly budget and variance view: use 5.10 Budget, Forecast and Variance.

The three-statement view is not a research finding; it is the reporting convention the accounting standards codify (IAS 1, now being replaced by IFRS 18). Accrual accounting separates the moment value is earned from the moment cash moves, so profit, cash flow and financial position are three different lenses on one business, and any one can look healthy while another fails. The gap between earning and collecting has a name, the cash conversion cycle, proposed as a liquidity measure because profit-based ratios miss it (Richards & Laughlin, 1980). Two other traditions feed this page: customer valuation research, on strong academic ground, which lets unit numbers be checked against the totals (Gupta, Lehmann & Stuart, 2004), and scenario planning, practitioner craft from corporate planning rather than tested method (Wack, 1985).

So Step 3 sets cash beside profit, where working capital is usually the culprit; Step 4 insists the sheet balances before any ratio is trusted; and Step 5 checks the unit story and adds a downside case.

Use actuals for a closed period, or a forecast for the next 12 months. Say which.

Strong answer: "Last financial year, actuals from the accounts. Rests on: our two largest retailers keep ordering; payment terms stay at 60 days; no new hires."

Period, and actuals or forecast:

The three assumptions the numbers rest on most:

Illustrative example: the business and all numbers are made up.

A furniture workshop in Jutland, Denmark, sells oak tables and chairs to design retailers.

Step 2: revenue 4.8 million DKK, direct costs 2.9 million, gross profit 1.9 million (40 percent). Operating costs 1.5 million, interest and tax 120,000, net profit 280,000.

Step 3: receivables grew by 300,000 and stock by 150,000, so operations used 170,000 in cash despite the profit. A CNC machine cost 350,000. A bank loan brought in 400,000. Cash fell from 300,000 to 180,000, about 10,000 a month: some 18 months of runway at this pace.

Step 4: assets 2.48 million (cash 180,000, receivables 800,000, stock 600,000, equipment 900,000). Payables 400,000, bank debt 1 million, equity 1.08 million. It balances.

Step 5: gross margin matches the unit sheet within two points. In a downside with revenue 15 percent lower, cash runs out before the end of the year. The four lines: profit thin but positive; cash shrinking because of slow-paying retailers and growing stock; biggest risk the largest retailer stretching terms further; lever: 45-day terms with that retailer, freeing about 200,000, owner CEO, before the spring order round.