Chances are you’ve heard of the accounting term ‘balance sheet’. But what is a balance sheet? And what does it tell you about your finances?
Your balance sheet is a financial statement that provides a snapshot of your company’s financial position at a specific point in time. It’s an overview of your finances that details three key elements of your accounting.
The formula for the balance sheet is Assets = Liabilities + Equity:
Assets: These are resources your business owns – things like cash, inventory or equipment – that provide future economic value and help generate your revenue.
Liabilities: These represent the company’s financial obligations or debts owed to outside parties – think bank loans, taxes or unpaid invoices.
Equity: This is the remaining interest in the assets after deducting liabilities. Equity represents the net worth of the business or, as the owner, your residual interest in assets after deducting all liabilities.
Ways the balance sheet informs your view of your finances
Liquidity and short-term solvency
By comparing your current assets to your current liabilities, you can use the balance sheet to reveal if the business can meet its immediate obligations. This is vital for ensuring you have enough cash or liquid assets to remain operational and trading.
Capital structure and leverage
The ratio of total debt to shareholders' equity illustrates how your company finances its growth. Are you relying too heavily on borrowed money? Or are you maintaining a sustainable level of debt that helps you fund the next stages in your growth?
Efficiency of your asset management
By reviewing your total assets against revenue trends, you can find out how effectively the company is utilising its resources – things like inventory and equipment – to support your business operations and generate long-term value for your stakeholders.
Working capital position
Calculating the difference between your current assets and liabilities helps you spot the operational capital buffer that’s available. This indicates whether the business can comfortably fund its day-to-day activities or if it faces a looming cash deficit.
Net worth and book value
The equity section of the balance sheet reflects the total value remaining for you, as the owner, after all debts are paid. This gives you a clear idea of the company’s intrinsic value and the overall cumulative financial success of the business.
Want to dig deeper in your balance sheet and financials?
If you’d like to understand more about your balance sheet and accounts, book some time with our team. We’ll be happy to explain more about your financial health as a business.