What Is A Balance Sheet?

If you’ve ever poked around your accounting software, spotted something called a Balance Sheet, and immediately clicked away… you’re in good company. For a lot of small business owners, the balance sheet feels like the most confusing report of the bunch. A mysterious list of numbers that seems to have nothing to do with the day-to-day running of your business and might require mental gymnastics to comprehend.

Once you understand what it’s actually showing you, the balance sheet becomes one of the most helpful tools in your financial toolkit. Think of it as a snapshot of your business’s health at a single moment in time. What you own, what you owe, and what’s truly yours.

Don’t worry, we’re doing this in plain English!

So… what is a Balance Sheet?

A balance sheet is a summary of your business’s financial position on a specific date. It shows three key things:

👉 What your business owns (assets)

👉 What your business owes (liabilities)

👉 What’s left for you after the maths (equity)

It’s called a balance sheet because, like a perfectly behaved seesaw, it must always balance:

Assets = Liabilities + Equity

Breaking it down (without the jargon)

1. Assets — what your business owns

Assets are simply the things of value in your business. They fall into two groups:

Current assets (short-term, easily turned into cash):

• Cash in the bank

• Customer invoices owed to you (debtors)

• Stock

• Short-term savings

Fixed assets (long-term, used to run your business):

• Equipment

• Vehicles

• Computers

• Machinery

  
  

Example: Jane’s Bakery owns a mixer worth £2,000, has £6,000 in the bank, and is owed £1,200 in customer invoices. Those are all assets.

2. Liabilities — what your business owes

These are the amounts your business is responsible for paying. Again, they split into two categories:

Current liabilities (due within a year):

• Supplier bills

• VAT owed

• Short-term loans or credit cards

• Payroll taxes

Long-term liabilities:

• Bank loans

• HP or finance agreements

  
  

Example: Jane owes £800 to suppliers for flour and packaging, and £3,500 on her bakery oven finance. Both are liabilities.

3. Equity — what’s left over for you

Equity is the part of the business that actually belongs to you (or your shareholders) after everything else is paid. It includes:

• Money you’ve invested

• Money you’ve taken out

• Retained profit (profit you’ve kept in the business over time)

Think of equity as the “business owner’s slice of the pie.”

Example: If Jane’s Bakery has more assets than liabilities, the difference belongs to Jane. That’s her equity.

A simple story: Jane’s Bakery (again!)

Imagine Jane wants to know how her business is really doing.

She checks her balance sheet and sees:

• Plenty of cash in the bank

• A healthy amount of equipment

• A manageable loan

• Not too many unpaid supplier bills

  
  

Even without calculating anything fancy, Jane can instantly see her business is stable. If she saw the opposite, lots of debt, not much cash, she’d know something needed her attention.

That’s the power of the balance sheet. It shows the truth behind the scenes.

Why your balance sheet actually matters

You might not look at your balance sheet daily, but it can tell you a lot about your business’s financial wellbeing. Here’s what it helps you understand:

1. How healthy your cash flow is

If your assets are mostly tied up in stock or unpaid invoices, you may feel “profitable but broke.”

2. Whether you can pay your bills

A quick comparison of current assets vs current liabilities shows whether things are comfortable or tight.

3. How much debt your business has

Useful for planning, borrowing, and avoiding unpleasant surprises.

4. What your business is actually worth

Especially helpful if you’re thinking about selling, securing investment, or just making smarter decisions.

5. Whether the business is growing over time

Compare this year’s balance sheet to last year’s and you’ll see real progress.

Common things small business owners notice

When you first start paying attention to your balance sheet, a few things tend to jump out:

• “Why do my customers owe me so much?”

• “Wow, that loan balance is still bigger than I thought…”

• “Do I really have that much stock sitting around?”

• “I didn’t realise I’d invested so much into this business!”

  
  

It’s a reality check, sometimes comforting, sometimes eye-opening, but always useful.

What to watch out for

A few tips to make sure your balance sheet gives a true picture:

• Make sure bank accounts are reconciled: If these are off, everything else will be too.

• Check that old invoices are correct: Outstanding amounts that should have been cleared will inflate your assets.

• Review loan balances: They don’t update automatically unless entered correctly.

• Don’t ignore negative numbers: A negative bank account or negative equity deserves attention.

How often should you look at it?

Monthly is ideal. Quarterly at the very least. Annual is… better than nothing, but by that point, the horse has usually bolted, wandered off, and set up a new life somewhere else. Short, regular check-ins help you spot patterns early and fix problems while they’re small.

Final thoughts

Your balance sheet isn’t just a collection of numbers. It’s a snapshot of your business’s overall health. What you own, what you owe, and what’s yours.

Once you understand how to read it, the balance sheet becomes a powerful tool that helps you:

• Make better decisions

• Understand your financial position

• Spot risks early

• Plan for the future

  
  

So next time your accounting software flashes “Balance Sheet” at you, don’t look away. Grab a cuppa, take a deep breath, and click. It’s not there to scare you. It’s there to help you understand your business better.