What Your Balance Sheet Can (and Can’t) Tell You
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Your Balance Sheet is one of the most important—but often misunderstood—financial reports for small business owners. Unlike the Profit & Loss (P&L) report, which covers a specific period, the Balance Sheet is a snapshot in time. It tells you what your business owns, owes, and what’s left over for you as the owner.
Understanding your Balance Sheet helps you assess your company’s financial position, not just its profitability.
What Your Balance Sheet Can Tell You
Your Current Financial Position
The Balance Sheet breaks down your assets, liabilities, and owner’s equity at a specific point, usually month-end or year-end. It shows how well-positioned your business is to pay its bills and fund future growth.
What You Own (Assets)
This includes cash, accounts receivable, inventory, equipment, and other resources with value. It helps you see whether you have enough assets to cover your expenses and debt.
What You Owe (Liabilities)
Your liabilities include credit card balances, outstanding bills, payroll taxes, loans, and more. Comparing assets to liabilities gives you a clear view of solvency.
Equity and Owner Investment
This section reflects how much of the business you actually "own" after debts are subtracted. It includes profits retained in the business, as well as any draws or contributions you’ve made.
For sole proprietors and single member LLCs: Equity = assets – liabilities – owner draws + contributions.
For S-Corps: Equity includes retained earnings and owner distributions.
What Your Balance Sheet Can’t Tell You
Business Profitability
The Balance Sheet doesn’t track your income or expenses over time, that’s what the Profit & Loss (P&L)is for. A strong asset base doesn’t necessarily mean the business is profitable.
Cash Movement
It shows how much cash you have at the moment, but it doesn’t explain where your cash is going or where it’s coming from, that’s the job of the Cash Flow Statement.
Expense Categories
You won’t find your marketing, rent, or payroll costs listed here. Those details live in the P&L.
The Bottom Line
Think of your Balance Sheet as your business’s financial x-ray. It’s a crucial part of understanding how healthy your business really is and how much equity you've built over time. To truly understand your business’s financial health, it’s important to review it alongside your Profit and Loss Report and Cash Flow Statement.
Balance Sheet: A snapshot of what your business owns (assets) and what it owes (liabilities) at a specific point in time, including what belongs to you as the owner (equity).
P&L (Profit & Loss): The story of your business’s profitability over a period.
Statement of Cash Flows: A report that tracks the actual movement of cash in and out of your business.
And remember, financial reports are only as useful as the data behind them. If your books aren’t clean, your reports won’t be reliable.
Need help making sense of your numbers?
At Balanced Integrity Bookkeeping, I help service-based business owners and entrepreneurs organize their books, understand their reports, and feel confident in their financial decisions.
Let’s chat! Book a free discovery call on our Book An Appointment page or contact us here.
