AN INTRODUCTION TO THE KEY FINANCIAL DOCUMENTS

There are three key financial documents that you might come across: the profit and loss
account, balance sheet and cash flow forecast. You will not necessarily be asked to
produce these documents but you will find it useful to have an understanding of what they
are if your colleagues refer to them. This article outlines the purposes and constituent
parts of each of the key documents.

Every organisation needs to be able to account for the money used to run its operations
and understand if it has sufficient funds available. They do this as means of planning for
the future. The profit and loss account, balance sheet and cash flow forecast all have a
different focus, but there are links between them and it is often necessary to look at all
three in order to truly understand the overall financial health of the organisation.
Often the technical nature of financial documents puts people off and makes them think
that they can’t understand them. In fact, all financial documents are based on some simple
principles which, once grasped, will allow you to make sense of the more complex forms
you may find in your organisation.
The profit and loss account
This is often referred to as the P&L. The organisation has been greater than the
P&L allows you to understand whether, expenditure. In other words, it shows
over a chosen period of time (often a whether the organisation is making a
month or year), the income of an profit/surplus or a loss/deficit.
The balance sheet
The balance sheet provides a snapshot of organisation but there aren’t enough
the financial viability of the organisation. It assets (cash in the bank or cash due from
provides a picture of the value of the debtors) to cover the payment in the
assets and liabilities of the organisation. coming period. If this is the case, the
organisation is technically bankrupt.
The organisation might have made a
profit for a chosen period but still have The balance sheet also shows the value
problems with the balance sheet at the of the organisation in terms of the
end of it. profit/surplus it has made to date and any
funds that people have put into the
In particular, its assets might be less than organisation in order to have a share in
its liabilities. This happens because debts its ownership.
(liabilities) are due to be paid by the

The cash flow forecast

The cash flow forecast is a way of
projecting the likely cash that will flow
through the organisation and is useful for
predicting any shortfalls that may arise. It
is different to the P&L as it shows only
cash and it records the likely timing of
cash payments and receipts. The P&L
shows income and expenditure in the
period when an invoice is issued or
received, not when the actual cash is
physically received or paid out.

Income and cash are different things. Income is another word

for the sales that have been invoiced or the funding that has
 been awarded. Cash is the physical money going into your
organisation’s bank account when the invoice or funding is
paid.
Planning
For planning and budgeting purposes,
organisations often prepare forecasts of
the P&L and balance sheet, as well as
the cash flow forecast. In large
organisations the finance department will
be involved in the detailed production, but
Reporting
In the same way that an organisation
uses financial documents to plan they will
also use the P&L and balance sheet to
report on their progress. Many
organisations have a legal obligation to
publicly publish their P&L and balance
sheet at the end of their financial year. To
ensure that the outside parties (e.g.
banks, lenders, investors, etc.) can
understand the figures and use the
information sensibly, there are a number
of technical guidelines and laws to help
with producing the P&L and balance
sheet. This makes the financial
they will often consult colleagues from
outside the finance department to ensure
that their forecasts are as accurate a
reflection of the organisation’s activities
as possible.
documents easier to read and interpret. It
also ensures that the published financial
documents of all organisations are
consistent. This allows outside parties to
compare the finances of one company
against another. Outside parties might
want to do this in order to make
investment decisions, for example. When
the financial documents are publicly
published they are known as the statutory
accounts. When the documents are
produced for use only within the
organisation, they are collectively referred
to as the management accounts.