What is a balance sheet and how can it help my business?

If you’ve ever looked at your balance sheet and quickly closed the tab again, you’re not alone. Like many small business owners, you may view it as a technical report for accountants, rather than a useful tool. But your balance sheet is full of fascinating insights about your business, and it only takes a little understanding to unlock them.

This guide will show you what your balance sheet actually tells you and how to read and interpret the report with confidence. You’ll also learn what the data can tell you about your business and the powerful decisions these insights can help you make. 

What is a balance sheet?

A balance sheet provides a snapshot of what your business owns and owes at a particular moment.

It’s one of the three core financial statements that help you understand your business’s performance and position. The other two are your profit and loss (P&L) report and your cashflow statement.

Think of your balance sheet as a financial health check for your business on a single date. 

How to read your business’s balance sheet 

A balance sheet might look intimidating at first glance – but once you understand its basic structure, it’s surprisingly straightforward. 

Every balance sheet has two sides: 

• your assets: money your business owns or is owed by others (displayed in the ‘Debit’ column) 
• your liabilities: money your business owes to others (displayed in the ‘Credit’ column)

The difference between the two is your business’s equity or net worth. If the business sold off all its assets and paid all its debts, the net worth is how much the business owner(s) would get to keep.

Why is this report called a ‘balance sheet’? Because the value of how much a business owns, less how much a business owes, will always come back to how much the owner(s) could keep if the business closed down. By understanding these numbers, you can gain powerful insights into how your business is really performing.

What does my balance sheet tell me about my business?  

Your balance sheet may simply look like a list of numbers – but in reality, it tells a powerful story about whether your business is healthy and stable and how resilient it might be in the face of challenges

Here are just some of the insights you can gain about your business when you review your balance sheet. 

Who owes your business money (and how much)

The trade debtors section of the report shows how much money others owe your business.  

When customers are slow to pay, it can put serious strain on your cashflow and limit your ability to invest elsewhere. Reviewing this figure can highlight whether too much of your cash is tied up in unpaid invoices.

Who your business owes money to (and how much)

The liabilities section of the report shows how much money your business owes. 

This could include:

• short-term debts, such as unpaid bills from suppliers
• long-term debts, like bank loans or lease obligations

Keeping an eye on this part of your balance sheet helps you stay ahead of upcoming payments, avoid cashflow surprises and assess whether your business is carrying too much debt.

Your business’s net worth

The equity section of your balance sheet shows the value of your business after liabilities are subtracted from assets. This figure represents your business’s net worth. 

A growing equity figure over time usually means your business is building value. If it’s shrinking, it may be a sign that your business’s day-to-day running costs are outweighing its income, or that it has too much debt compared to how much it owns in assets.

Whether your business is financially stable

A balance sheet helps you see whether your assets can comfortably cover your liabilities: a key indicator of financial stability. 

For example, when you compare your current assets to your current liabilities, you can see if you have enough short-term assets to cover what you owe.

Be aware that your current assets may not all be liquid - i.e. cash or assets that can be quickly converted into cash. For instance, if a lot of your current assets are unpaid invoices, then you won’t be able to use those to pay your debts until your customers pay you.

By reviewing these figures regularly, you can spot trends and potential risks early – like rising debt, late-paying customers or slow-moving stock – before they become bigger problems.

What business decisions can my balance sheet help me make? 

When you understand your balance sheet, you have a strong foundation for making confident, informed decisions. Here are some of the real-life business questions that the insights in your balance sheet can help you answer:

Can I afford to invest in additional resources?

Whether you’re thinking about hiring new team members, upgrading equipment or buying more stock, your balance sheet shows whether you have enough money available to support that investment. 

If you don’t have much money in your business bank account or too much money is tied up in unpaid invoices, you might decide to delay your plans and focus on improving cashflow first.

Could my business handle more debt?

If you believe taking out a business loan would be a smart move for growth, your balance sheet can help you assess whether it’s financially feasible.

If your liabilities are already high in comparison to your assets, additional borrowing could overextend your business and leave you owing more money than you can pay. By comparing your debt to your assets, you can gain a sense of whether more borrowing will be manageable and whether lenders are likely to view you as a safe bet.

Do I need to change the way I manage stock or cash?

Your balance sheet is full of insights that can help you fine-tune day-to-day operations and protect your business.

If your levels of stock on hand (inventory levels) are rising faster than sales, it might be a sign that you’re ordering too much stock at a time or that stock is moving slowly. 

And if the amount of cash you have in your bank accounts is shrinking, it could signal that your business’s earnings can’t keep up with its spending. 

How healthy is my business overall?

Reviewing your balance sheet regularly over time will give you a clear picture of how your business’s financial position is evolving. It can help you answer questions like:

• do you have enough cash available to pay your debts when they are due?
• if your business were to close, how much would you have left to keep?
• how much of your business’s value is tied up in capital assets, which take longer to turn into cash?

These trends indicate whether your business is moving in the right direction and on track for sustainable, long-term growth.

Where can I find my business’s balance sheet?

If you use accounting software like FreeAgent, your balance sheet is likely to be just a few clicks away. The software automatically updates your financial data as you record invoices, expenses and payments. It’s the simplest, most reliable way to get an accurate balance sheet at any point in time.

Not using accounting software? There are a couple of other ways to get a balance sheet. If you work with an accountant, they can prepare the report using your records, usually at the end of the accounting year. 

If you don’t work with an accountant, you could use a spreadsheet to create your own balance sheet, although this approach is a lot more work and you’ll need to check your numbers extremely carefully. 

Inside FreeAgent’s Balance Sheet report 

Want to dig into your business’s financial data and gain the insight you need to plan ahead and make smart decisions? With FreeAgent’s Management Reports, the information is at your fingertips. 

Using the data you enter throughout the year, FreeAgent builds the following reports in real time:  

• your Balance Sheet report
• your Profit and Loss report
• your Aged Debtors report
• your Aged Creditors report

Your FreeAgent Balance Sheet shows you everything that your business owns (capital and current assets) and owes (current liabilities) at a given point in time.

FreeAgent handles all the double-entry bookkeeping associated with transactions like creating bills, invoices and out-of-pocket expenses and explaining bank transactions. This means your FreeAgent Balance Sheet should always balance.