When I pick up a new client's financials for the first time, I'm not reading them linearly. I'm running a triage.
The goal in the first 30 minutes isn't to understand everything. It's to find out where the real problems are so I'm asking the right questions before I spend hours going deeper into the wrong things.
Here's the sequence that works for me.
Start with the Balance Sheet, Not the P&L
This surprises people. Most financial conversations start with the income statement — how much did you make, what are the margins, what's trending up or down. I go to the balance sheet first.
The balance sheet tells me the position of the business right now. It tells me whether the company has the financial strength to absorb a problem, take on debt, or survive a slow quarter. And it tells me things the P&L deliberately hides.
The first number I calculate is working capital — current assets minus current liabilities. This is the cushion the business has to operate on a day-to-day basis. Thin working capital is one of the most reliable early indicators that a business is under stress, even when the income statement looks acceptable.
The second is debt-to-worth — total liabilities divided by total equity. A ratio above 3:1 starts getting uncomfortable for most lenders. Above 4:1, the business has borrowed heavily against its equity and has very limited room to take on additional obligations.
I'm also scanning for anything on the balance sheet that looks odd — receivables that are too large relative to revenue, inventory that looks out of scale, related-party loans that haven't been explained, or a negative retained earnings balance that tells me the business has been distributing more than it's earned over time.
All of that takes about five minutes. By then I already have a rough hypothesis about the financial health of the business.
Move to Accounts Receivable
After the summary balance sheet picture, I pull the AR aging report if I have one — or look at how receivables are characterized on the balance sheet.
Receivables days outstanding — total receivables divided by daily revenue — is one of the fastest gauges of how efficiently the business collects. If average days outstanding is 60 or 70 and the industry standard is 30 to 35, that's a working capital problem hiding in the receivables.
I'm also looking for concentration. A business where 40% of receivables are owed by a single customer has a concentration risk that the summary balance sheet doesn't show. If that customer pays slow, or disputes an invoice, the liquidity impact is immediate and significant.
Any balance in the 90+ day column gets immediate attention. Receivables beyond 90 days are often uncollectible in practice, even when they're still sitting on the books at full value. A business carrying a large 90-day balance without a reserve for doubtful accounts is overstating its assets.
Check the Income Statement for Margin Trends, Not Just Revenue
When I finally get to the P&L, I'm looking at margins across periods, not revenue.
Revenue going up is easy to celebrate and easy to inflate. Margins are harder to fake for long.
I want to see two or three years of income statements side by side. What has happened to gross margin as a percentage? If revenue grew 20% but gross margin percentage compressed by four or five points, the business is growing at the wrong price — they're buying revenue they're not actually making money on.
I also look at the relationship between revenue growth and SG&A growth. A business that grew revenue 30% while administrative costs grew 50% has a leverage problem developing. The overhead is growing faster than the business can support it.
Look at Cash Flow Against Income
This is where I catch most of the things that didn't show up in the first three steps.
A profitable business that consistently has less cash than the income statement suggests is either distributing heavily, carrying receivables that aren't converting, building inventory they can't move, or servicing debt that doesn't show clearly on the P&L. Sometimes it's all four.
If I have a statement of cash flows, I go straight to operating activities. A positive net income alongside negative operating cash flow is a flag that deserves an explanation. It usually has one — but it needs to be understood.
If I don't have a formal statement of cash flows, I can reconstruct the cash picture roughly by comparing beginning and ending cash balances across periods and looking at what changed on the balance sheet. It's less precise, but it still tells the story.
The Questions I Always Ask Before Going Deeper
By the end of this first pass, I have a list of specific questions for the owner or the bookkeeper. Not general "tell me about the business" questions — specific ones, tied to specific line items.
Something like: Your receivables days outstanding is sitting at 78. Is that seasonal, or is that where it's been for the last two years? Or: Your retained earnings went down $300,000 last year while the business was profitable. What did you distribute?
These questions accomplish two things. First, they get me faster to the real answers. Second, they tell me something about the quality of the client's financial understanding. An owner who can answer these questions precisely is a different kind of client than one who says "I'd have to ask my bookkeeper."
Neither answer is necessarily a problem. But they point to different conversations.
The first 30 minutes isn't about knowing everything. It's about knowing what to ask next.
Joshua R. Bohlke spent over a decade as a commercial banker before serving as CFO and financial advisor to businesses from $1M to $50M in revenue. He works with business owners and their advisors on financial clarity, credit, and operational improvement.
jrbohlke.com • The Analysis