Table of contents
Table of contents
The idea of looking at financial reports for your business can feel unnecessarily corporate. After all, you’re not running Amazon (unless you are, in which case our performance report is going to look amazing this month). Anyway, our point is that financial reporting isn’t just for big organisations, and anyone can benefit.
Which is why, dear reader, in this article, we’ll be explaining what balance sheets are, what they do, and how to use them.
Balance sheets, sometimes referred to as a ‘statement of financial position’, are a type of financial report which takes the confusing array of facts and figures you record about your business, and turns it into a snapshot of your current assets, liabilities, and shareholders’ equity at a particular point in time.
You might sometimes see shareholder’s equity referred to as ‘capital’. In short, it’s the total net worth of a company after debt. So, depending on the value of assets it owns compared to any debts it has, your shareholder’s equity can either be positive or negative amount.
This is one of those times where ‘positive’ really is a positive because it means your company has enough assets to cover its liabilities (so if you needed to, you could sell what the company owns in order to pay its debts).
A negative amount, on the other hand, indicates your liabilities outweigh your assets. If the people you owe money to suddenly want it back, you’re going to run out of things to sell before you’ve finished paying them.
Banks, lenders, and potential investors like to look at things like your balance sheet before they decide whether or not to get involved with you, because having negative equity over a long period of time can indicate a higher level of financial risk.
Your balance sheet report shows you what’s happening at a particular point in time, so comparing them can help you track your progress (hopefully).
They’re also handy to show investors, because they provide an insight into your business’s financial health – for example, by looking at the debt-to-equity ratio.
You’ll record your assets, which are what your business owns – including cash in the bank, any property your business has, and any equipment. Liabilities are what you owe; think any loans you’re currently paying back, staff wages (if you have anyone who needs paying), and – of course – taxes. Your shareholder equity is the value of what’s left once you deduct all your liabilities from your assets.
Your total assets should be equal to your liabilities plus equity. If they aren’t the same (and it isn’t due to an accounting error) it may indicate a cashflow issue. So, it’s important you check this ASAP!
Let’s say your company takes out a five-year loan for £8,000 from the bank. In your bookkeeping your assets (to be specific, your cash account) will increase by £8,000 once the loan is received.
To balance both sides of the equation, liabilities in your long-term debit account will also increase by £8,000.
Like all reports, your balance sheet can give you a good idea of how financially healthy your business is, showing:
Your first (and maybe even second) glance at a balance sheet might seem a bit overwhelming until you get the hang of what information is shown where.
Most balance sheets will go in order of assets first, followed by liabilities and then shareholder’s equity (also known as ‘capital’) – either from top to bottom or from left to right.
Some reports will show a list of all the categories which were used to calculate the section totals. For example, your assets section might say something like:
Category
Equipment
Stock
Amount owed from customers
Starling bank account
PayPal account
Total Assets
Assets (£)
£5,000
£346
£26,019
£2,628.84
£16,024
£50,017.84
If you’re using fancy accounts software (like Pandle – just to remind the boss why we work here) then you’ll even be able to click on a category name and see a list of all the transactions which that amount is made up of.
Other software providers (or your accountant if you’re getting reports from them) may do things slightly differently though, so keep an eye out for the headings to guide you along the balance sheet.
It’s worth remembering that your balance sheet alone won’t tell you everything about your business. While they’re useful, take a look at both your income and cash flow statements alongside it to paint a much clearer financial picture. Our table below includes some examples of things your balance sheet report doesn’t show.
Profits and losses
Cash flow
Claims against assets
What a balance sheet won’t show
To determine whether or not your business is making money, you’ll need to look at your profit and loss report
Cash flow is (pretty literally) the flow of cash as it comes into your business and goes back out again. Knowing the timing of this can help you plan to have enough money to pay your bills on time, so you’ll need a cash flow statement or forecast for this bit
Your balance sheet also won’t tell you if your creditors (who you owe money to) have claimed against any assets you own
There are other things it won’t show you, such as what to have for tea (does anyone know the answer to that?) but these are a few notable examples.
Most businesses will prepare balance sheets at the end of each quarter to compare how they did in the previous quarter – while others may do one weekly, monthly, or yearly.
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A content writer specialising in business, finance, software, and beyond. I'm a wordsmith with a penchant for puns and making complex subjects accessible.
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