If I asked you which figure you check most often in your business, what would you say?
Your bank balance?
Your profit and loss report?
Or your balance sheet?
If you said the first two, you’re definitely not alone.
Lots of business owners I speak to rarely look at their balance sheet. And even when they do, they’re not entirely sure what they’re looking at.
So, let me explain it in plain English.
What is a balance sheet?
Think of your balance sheet as a snapshot of your business’s financial position on one particular day.
While your Profit & Loss tells you what you’ve earned and spent over a period of time, your balance sheet shows you what your business owns, owes and is worth at that point.
There are three main areas to understand.
1. Assets: what your business owns
This could include:
• Money in the bank
• Equipment, machinery or vehicles
• Stock
• Money customers owe you
If you’ve invoiced a customer £5,000 but they haven’t paid yet, for example, that money can appear as an asset. It’s one reason your bank balance alone doesn’t tell you the whole story.
2. Liabilities: what your business owes
Now look at what needs to be paid.
This might include:
• Supplier bills
• VAT owed to HMRC
• PAYE or Corporation Tax due
• Loans and finance
• Other outstanding debts
This is where checking only your bank account can catch you out.
Seeing £20,000 sitting in the bank feels reassuring. But if £8,000 is needed for VAT and tax and another £5,000 is owed to suppliers, you don’t really have £20,000 available to spend.
3. Equity: what’s actually left
Put simply, this is:
Assets minus liabilities = equity
It helps you understand the underlying value built up in the business.
Why should you care?
Because a profitable business can still have financial problems.
Your balance sheet can help you spot growing debts, slow-paying customers, increasing borrowing or money tied up in stock.
And when you compare balance sheets over time, you can start to see whether your business is actually getting financially stronger.
Your bank balance tells you how much cash you have today.
Your P&L tells you whether you’re making a profit.
Your balance sheet helps tell you how financially healthy your business really is.
You need all three.
And if your balance sheet currently looks like a page of numbers that means absolutely nothing to you, that’s OK. It just needs someone to explain what those numbers are telling you about your business.
That’s exactly the sort of thing I love making simple.
Lucie
LEO Bookkeeping
Share this post: