Key takeaways
- A condo developer's statements are the reverse of an ordinary business: customer money arrives years earlier, but revenue arises only on ownership transfer.
- Accumulated losses before transfers begin are normal in accounting terms, but they do not mean financial safety. The real risk lies in the balance sheet and cash flow.
- Five of the eight numbers a project owner must watch are not in the financial statements. They must be drawn from the sales and construction teams.
- The bank statement is the reference point that is hardest to manipulate. Every review should walk back to it.
The examples in this article are written to illustrate risk patterns and do not identify or accuse any person or entity. Warning signs are grounds for further review, not a conclusion that wrongdoing has occurred.
Reading the three statements as one story
Owners do not need to be accountants, but they must read the three statements to see the story of the business. Each statement answers a different question.
| Financial statement | Answers the question | What the owner should focus on |
|---|---|---|
| Income statement (P&L) | Over the past period, did the business make a profit? | Revenue, gross profit, net profit, trend versus the previous month |
| Balance sheet | As of today, what does the business own, and whom does it owe, and how much? | Cash, receivables, inventory, payables, loans, equity |
| Cash flow statement | Where does cash flow in and out? | Is cash flow from operations positive? |
The balance sheet is a still picture at period end, while the income statement and the cash flow statement are moving pictures across the period. All three must tell the same story. If profit grows but cash shrinks, something is draining cash and hiding it in receivables, inventory or debt repayment.
Profit, but why no cash?
The statements show a profit, yet the bank account is tight. There are four common causes
- Credit sales: revenue is booked but not yet collected, so the cash sits in trade receivables.
- Bloated stock: too much has been bought and stored, so cash is sunk in inventory.
- Loan repayments or asset purchases: cash goes out, but it is not an expense in the income statement.
- Directors' withdrawals or dividends: these reduce cash but do not affect profit.
Quick check: real profit or paper profit?
Cash flow from operations (CFO) should be close to, or higher than, net profit over the long run. If net profit stays positive but CFO is persistently negative, find out whether the cash is sunk in receivables or stock, or being drawn out through directors. For developers that have not yet begun transfers, read this rule together with the cash cycle in the next section.
What the statements are warning about
| Symptom in the statements | May be warning that |
|---|---|
| Receivables growing faster than sales | Cash is not being collected, credit is lax, or fictitious revenue may be inflating sales |
| Inventory growing while sales are flat | Slow-moving or deteriorating stock, or ghost stock (no physical goods) |
| Trade payables stretching abnormally | Tight liquidity; suppliers cannot be paid on time |
| Director loans or director receivables growing | Company money is being taken for personal use, which is a tax and director-duty issue |
| Gross margin (%) falling continuously | Cost leakage, underpricing, or fictitious costs slipped in |
| Cash and cash equivalents shrinking fast | Cash burn; risk of running out of liquidity within 1–2 quarters |
The 8 numbers for an ordinary business owner
The warning thresholds in the table are indicative only; adjust them to the industry and the size of the business.
| Number / ratio | What it tells you | Red flag |
|---|---|---|
| Gross profit margin (GPM) | How much is left after sales, before expenses | Down by more than 3–5 percentage points versus the previous period |
| Net profit margin (NPM) | What percentage of profit is left at the end | Negative, or positive but with negative CFO |
| Days sales outstanding (DSO, days) | How many days it takes to collect the cash | Lengthening steadily, or beyond the credit terms given |
| Days inventory outstanding (DIO, days) | How many days goods sit in stock | Lengthening means stale or obsolete stock |
| Current ratio | Current assets to current liabilities | Below 1.0 |
| Debt-to-equity (D/E) | How heavily the business relies on debt | Unusually high compared with the industry |
| Cash flow from operations (CFO) | Can the business generate cash by itself? | Persistently negative |
| Cash on hand relative to monthly expenses | How many months the business can last (runway) | Below 2–3 months |
Example: profit on paper, cash missing from the account
A building materials trading company showed net profit rising every year, yet the owner had to borrow more to pay salaries. Dissecting the numbers showed that trade receivables had tripled in two years, with more than half owed by a few customers who had never actually paid. Sales had been booked to make the statements look good for a loan application. The result was bad debts, tax problems from paying tax on revenue never received, and suspicions of window-dressing the accounts.
Lesson: profit that does not turn into cash is profit that should be questioned.
Project owner's corner: what to look for and what to ask
- Ask for the “three statements + comparison with the previous month and previous year” every month, not just the sales figures.
- Ask one question every month: how much of this period's profit turned into cash? If not all of it, where is the rest stuck?
- Treat runway as a survival number.
Internal auditor's corner: checkpoints
- Test that the statements tie together (tie-out) using the formula below.
- Perform trend and ratio analysis (analytical review) across three periods to find anomalies that need supporting evidence.
- Vouch cash and deposits to the bank statement and the bank confirmation.
Opening retained earnings + net profit − dividends = closing retained earnings
Why condo developer statements read differently
The risk structure of a developer building condos for sale differs from that of an ordinary SME in two dimensions. First, project costs pile up in the work in progress (WIP) account, revenue does not arise until ownership transfer at the land office, and money already paid by customers is a liability. This makes the usual warning signs, such as falling profit or bloated receivables, unusable. The second dimension arises when the company sends its accounting work outside the company. See the details in Related-party transactions and cash leakage
The cash cycle: money comes in first, revenue comes later
Customer cash arrives years ahead, but accounting and tax revenue does not arise until ownership transfer. In the meantime, every payment from customers is a liability, and everything spent on land and construction is an asset, not an expense.
| Project stage | Cash | What happens in the statements | What has not yet happened |
|---|---|---|---|
| 1. Buy land, design, obtain permits | Large outflow | WIP-Development rises for land and design fees | No revenue and no cost of sales yet |
| 2. Launch sales (Presale), receive booking deposits and down payments | Continuous inflow | Customer advances (a liability) increase | No revenue recognised yet under TFRS 15 |
| 3. Construction | Outflows by progress payment | WIP-Development rises for construction costs | No cost of sales yet in the income statement |
| 4. Ownership transfer | Final instalment received | Revenue and cost of sales recognised, with customer advances cleared | Specific Business Tax (SBT) and transfer fee liabilities arise at this point |
Until step 4 is reached, a developer's income statement shows only selling and administrative expenses, which must be expensed immediately and cannot be capitalised into the project. Losses every year are therefore normal in accounting terms, but normal in accounting terms does not mean financially safe, because the real risk has moved to the balance sheet and cash flow.
The two largest accounts in a developer's statements are WIP-Development and customer advances. See the classification and checkpoints in Abnormal WIP and Customer advances and how the money is used
The project owner's 8 numbers
Use this set in place of the ordinary business's 8 numbers when reading a developer's statements.
| Figure | What it tells you | Red flag |
|---|---|---|
| Cumulative project cost (WIP) versus project budget | Is the project over budget yet? | WIP growing faster than actual construction progress (%) |
| Cost to complete | How much more funding is needed before transfer is possible | Without this number, no one knows whether the money is enough |
| Cumulative sales and number of units (take-up rate) | How well the market is taking the project | Flat for several quarters while costs keep running |
| Customer advances versus cash on hand | What has the customers' money been spent on? | Customer advances are very high but almost no cash is left; check whether money has been moved out of the project |
| Transfer pipeline for the next 6–12 months | When will the next block of revenue and cash arrive? | Pipeline is empty but contractor payments continue |
| Balance with affiliated companies (net) | Who has borrowed the project's money? | Balance keeps growing, with no agreement, interest or repayment date |
| Cancellation rate | Quality of the recorded sales | Rising means customer advances may have to be refunded, hitting liquidity immediately |
| Cash on hand versus monthly fixed costs (runway) | How many months can the project last with no new money coming in? | Below 3 months, in a project that has not begun transfers |
Internal auditor's observation
Five of the eight numbers above are not in the financial statements: budget versus WIP, cost to complete, take-up, transfer pipeline and cancellation rate. They must be drawn from the sales and construction teams. If the company outsources its entire accounting, the service provider cannot produce these numbers, because it sees only the documents sent to it for posting. This is an information gap the owner must close personally.
Following the money trail and the paper trail
Dissecting the statements means following the money trail and the paper trail until they meet. The order of evidence to use is
- Financial statements: the overview and the anomalies to drill into
- Bank statement: the real money trail, used to reconcile with revenue and expenses in the accounts
- General ledger (GL): item by item; look at the account pairings, dates, who recorded the entry, and reversals
- Input VAT, output VAT and PP 30: reconcile to revenue and costs in the accounts
- Tax invoices and supporting documents: purchase orders, goods received notes, contracts, evidence of delivery and payment
Who looks at what
| Reviewer | Main focus | Question in mind |
|---|---|---|
| Forensic accountant | Traces of fraud, money trails, abnormal patterns | Where did the money go, who benefited, who does the evidence point to |
| External auditor | Whether the statement of financial position complies with the standards: existence, completeness and valuation | Is there enough evidence behind this figure to give an opinion? |
| Revenue Department | Is all revenue reported? Are expenses and input VAT eligible? Were returns filed correctly? | Is the state receiving all the tax it should? Was there any intent to evade? |
| Bank (credit) | Repayment capacity, cash flow, collateral, consistency | If we lend, will we be repaid? Do the financial statements match the money actually received in the account? |
| DSI / Special Cases | Criminal offences and money laundering, intent, networks, money trails | Is this an organised scheme? Were the assets lawfully acquired? |
If you can review your own financial statements through these five lenses first, you will find problems before outsiders do and fix them before they become a case.
Example: polished financial statements for a loan application, caught by the bank from the bank statement
One company inflated its revenue to obtain a credit facility, but the credit officer reconciled the revenue in the financial statements with the money received in the bank account over the previous 12 months. The cash actually received was far lower than the revenue reported. The application was rejected, and the company's credibility with the bank was damaged for the long term. Submitting false documents to a financial institution can also expose the company to legal liability.
Lesson: The bank statement is the hardest truth to dress up, and every party uses it as a reference point.
Project owner's corner: what to look for and what to ask
- Before submitting financial statements to a bank or the Revenue Department, have the team reconcile revenue in the accounts, PP 30 and money received in the bank account until they agree.
- Keep supporting documents complete from the start. On the day you apply for a loan or are audited, there is no time to chase them.
Internal auditor's corner: checkpoints
- Prepare a working paper for each process, with cross-references to the evidence: financial statements to GL to bank statement to invoice.
- Run one case lab per quarter, randomly selecting a risky transaction and tracing it along its full path.
The people around you read the same financial statements from different angles
| Party | Reads the financial statements to | Concerns or what they look for |
|---|---|---|
| Partners / shareholders | Returns and transparency | Is the profit real? Is money being drawn out through directors? Are dividends fair? |
| Directors | Fiduciary duties | Items they are responsible for, approvals, related-party transactions |
| Creditors / trading partners | Ability to pay | Liquidity, payment history, whether trade payables are being stretched abnormally |
| Bank | Credit risk | CFO, D/E, collateral, whether the financial statements match the bank statement, Covenants |
| Investors | Growth potential and quality of earnings | Quality of revenue, growth, hidden risks |
| Revenue Department | Tax accuracy | Complete revenue, eligible expenses and input VAT, intent to avoid tax |
| DSI / law enforcement agencies | Criminal offences and money laundering | Abnormal money trails, transactions with no commercial rationale, networks |
Project owner's corner: what to look for and what to ask
- Prepare a proactive one-page explanation for the risky items that every party tends to ask about, such as loans to and from directors, a sudden jump in profit, and shrinking cash.
- Use the same set of financial statements for every party. Having multiple versions is a serious warning sign.
Internal auditor's corner: checkpoints
- Test that related-party transactions are fully disclosed and properly approved.
- Assess the consistency of the financial statements sent to each party. They must be the same set.
This content is management and internal audit guidance, not a legal or tax opinion for a specific case. Check the current law and consult an auditor, tax adviser or lawyer before making decisions in a real case.