Balance Sheet
2025-01-01
A Balance Sheet is a fundamental financial statement that provides a snapshot of a company's financial position at a specific point in time. It shows what the company owns (assets), what it owes (liabilities), and the owners' equity stake. The balance sheet follows the accounting equation: Assets = Liabilities + Equity, and must always balance, hence the name.
The Balance Sheet has three main sections:
Assets = Everything the company owns or controls that has value
Liabilities = All debts and obligations the company owes to others
Equity = Owners' residual interest after liabilities are subtracted from assets
Key asset categories include:
Current Assets (converted to cash within one year):
- Cash and cash equivalents
- Accounts receivable
- Inventory
- Prepaid expenses
Non-Current Assets (long-term value):
- Property, plant, and equipment
- Intellectual property
- Investments
- Goodwill and intangible assets
Key liability categories include:
Current Liabilities (due within one year):
- Accounts payable
- Accrued expenses
- Short-term debt
- Deferred revenue
Non-Current Liabilities (long-term obligations):
- Long-term debt
- Deferred tax liabilities
- Pension obligations
Equity components include:
- Share capital (common and preferred stock)
- Retained earnings (accumulated profits)
- Additional paid-in capital
The balance sheet provides critical insights for business analysis:
- Liquidity Assessment: Current ratio (current assets ÷ current liabilities) shows ability to pay short-term obligations
- Financial Leverage: Debt-to-equity ratio reveals how much debt finances the business
- Asset Efficiency: Shows how effectively the company uses resources to generate revenue
- Growth Funding: Indicates whether growth is funded by debt, equity, or retained earnings
For startups and growing companies, key balance sheet considerations include:
Cash Position: Critical for Runway calculations and Burn Rate sustainability Accounts Receivable: Outstanding customer payments that affect cash flow Deferred Revenue: Prepaid subscriptions common in SaaS businesses, representing future service obligations Equity Structure: Different share classes and investor rights affecting ownership
Balance sheet analysis complements Profit and Loss Statement analysis by showing:
- How profitable operations translate into balance sheet strength
- Whether Top Line Revenue growth requires proportional asset investments
- How Bottom Line profits accumulate as retained earnings
- Cash generation relative to reported profits
Common balance sheet ratios include:
- Working Capital: Current assets minus current liabilities
- Book Value: Total equity representing net company worth
- Asset Turnover: Revenue generated per dollar of assets
- Return on Assets: Net income divided by total assets
Understanding balance sheet dynamics helps founders manage cash flow, evaluate funding needs, assess financial health, and communicate business strength to investors and lenders.