A guide to reading the balance sheet and income statement: understanding your financial statements

Receiving a balance sheet and an income statement (CPC) can seem complex to many entrepreneurs. Yet these documents are essential: they give a clear view of the company’s financial health and performance.

In Morocco, they are part of the financial statements required by the General Accounting Standards Code (CGNC), alongside the management balances statement (ESG), the statement of funds and the additional information statement (ETIC). Knowing how to read them helps you manage your business better, anticipate cash needs and talk more effectively with banks and financial partners. Here is a simple, practical guide to getting useful information out of them.

1. Start with the income statement (CPC)

The income statement presents all the company’s income and expenses over a financial year, usually one year. It distinguishes three levels of activity:

• operating: turnover, operating grants, purchases, external charges, staff costs;
• financial: investment income, interest on loans;
• non-current: non-current income and expenses, such as disposals of fixed assets or penalties.

When income exceeds expenses, the company makes a profit. If expenses exceed income, it records a loss.

To go further, the management balances statement (ESG) presents key indicators: gross margin on goods for resale, value added, gross operating surplus (EBE), current result and self-financing capacity. These figures help you understand where the company’s performance — or its difficulties — comes from.

2. Reading and understanding the balance sheet

Unlike the income statement, the balance sheet is a snapshot of the company’s position on a given date, usually the end of the financial year.

Assets and liabilities: what do they mean?

• Assets represent uses of funds: what the company owns or is owed.
• Liabilities represent the resources that finance the assets: the equity contributed or built up by the shareholders, and debts owed to third parties.

The main items to analyse are:

• equity (share capital, reserves and profit for the year);
• the make-up of fixed assets and how far they have been depreciated;
• the amount of trade payables, tax and social security debts;
• trade receivables and the value of inventory;
• available cash and financial investments.

Spotting the warning signs in the balance sheet

Some indicators should catch the entrepreneur’s attention. For example:

• negative equity, or equity below share capital;
• high operating debts compared with receivables and cash;
• significant financial debt;
• rising inventory without a rise in turnover.

In these cases, it is advisable to analyse the situation in more detail in order to anticipate any difficulties.

3. Understanding the link between the income statement and the balance sheet

The net result calculated in the income statement is carried directly into equity on the balance sheet.

In other words, good performance strengthens the company’s financial structure, while a loss weakens it. Understanding this link is essential to measure the real impact of results on financial strength in the medium and long term.

4. The key role of the chartered accountant

Even with a good understanding of the figures, the support of a chartered accountant remains essential.

A meeting after the financial statements have been prepared lets the accountant explain the figures, identify the year’s significant events and make concrete recommendations. It is a good idea to take notes during this meeting to keep a record of the analysis and the suggested improvements.

5. Practical tips for entrepreneurs

To make better use of your financial statements, you can adopt a few simple good practices:

• Compare financial years: analyse how turnover, margins and expenses change from one year to the next.
• Keep an eye on cash: sufficient cash lets you meet short-term obligations. Conversely, repeated cash strain should be a warning sign.
• Use financial ratios: gross margin, inventory turnover or debt ratio are easy indicators to track.
• Get support: a chartered accountant can help you set up regular budget monitoring and suitable dashboards.