There is a saying we use in the trading world: "Turnover is vanity, profit is sanity, but cash is king."

In the SBL exam, you will often be given a set of financial statements that look healthy on the surface. Revenue is up 20%. Net Profit is up 10%. The CEO in the scenario is celebrating.

Your job is to ruin the party.

If you look closer, you might see that Receivables days have jumped from 30 to 90. You might see that the "profit" is entirely due to a revaluation of property, not sales. You might see that while the P&L shows a surplus, the bank overdraft is maxed out.

The "Overtrading" Trap

One of the most common ways businesses die is not by failing to sell, but by selling too much without the capital to back it up. This is called Overtrading.

When I look at a set of accounts for a new acquisition, I ignore the Net Profit line initially. I look at the Cash Flow Statement.

  • Operating Cash Flow: Is the core business actually generating cash?
  • Investing Cash Flow: Are they burning cash to keep the lights on?
  • Financing: Are they surviving on loans?

How to Write Like a CFO

To score professional marks in the Financial Analysis questions, you need to sound like a skeptical investor, not a calculator.

  1. Don't just calculate the ratio. Anyone can calculate that the Current Ratio is 1.5. A computer can do that.
  2. Tell me the story behind the number. Why has the ratio dropped? Is it because they bought too much inventory (bad)? Or because they paid off a massive loan (good)?
  3. Link it to Strategy. If the company's strategy is "Rapid Expansion," but their Gearing (Debt/Equity) is already at 80%, the strategy is dead on arrival. You must point this out.

The Integrated View

In the modern boardroom, financial capital is just one part of the picture. We also look at Intellectual Capital and Social Capital.

If a company slashes its training budget to boost this year's profit, they haven't created value — they have stolen it from the future. The SBL examiner expects you to spot these short-term tricks.

In the CAPEX Executive Cohort, we teach you to look beyond the spreadsheet. Stop reading the P&L. Start reading the business.