The balance of power: what we can learn from the balance sheet?


To a business newcomer, “the balance sheet” is often a slightly intimidating term that makes them think of a dry piece of paper focusing entirely on the financial reality of their company. In actuality, it’s a useful tool to show where your business is standing and, with the help of a provider of outsourced accountancy solutions, it can be used to identify the true stability of a business and what areas might require attention in order for it to prosper.

A moment in time

The important thing to remember is that the balance sheet is a snapshot; it’s not about what your business has been through or where it might be going, it’s a representation of how the business is managing to keep itself going at one particular time – usually the year end. It’s designed to give a brief representation of how ins are matching outs within the company.

The balance sheet shows how the assets of the business weigh up against its liabilities plus the owner’s equity. If calculated correctly, these should cancel each other out (hence the name ‘balance sheet’) because you have obviously financed your assets one way or another. You could think of it as being the kind of algebraic equation you studied in school, where assets = liabilities + equity.

What does it teach you?

Perhaps the main thing you can learn from your balance sheet is to what extent your company’s assets are covering your liabilities, and whether or not you are relying on your own investment to keep the business operable.

Once this is identified, you can turned to your profit/loss statement to look into the specifics of what is bringing in money, as well as establish if there are any areas for which cash might be better spent elsewhere.

It’s also important to differentiate between fixed assets (items like computers and company vehicles that drive profit in the long term and help you provide your service) and current assets (products or services you have created and that are ready to sell). Having enough of the latter is crucial, because these are the solution to your company’s short-term liabilities.

Again, the maximum benefit can be gleaned from tools like the balance sheet by having them monitored by a professional accountant. By outsourcing accounting, you can free up more time for yourself which, in turn, will help you gain the control you need to steer the business in the right direction.