If you’re running a startup or thinking of building one, you’ve probably heard about the balance sheet. Some say it’s just for accountants. Others call it the ten-second readout of whether your company is healthy or not. But what is it, and why does it actually matter?
What Even Is a Balance Sheet?
Think of the balance sheet like a snapshot of your company’s financial position on a specific day. It shows what you own, what you owe, and what’s left after paying those debts. The official formula is: assets = liabilities + equity.
You might not look at the balance sheet every day, but when you need funding or want to make big decisions, this is the first place investors and lenders turn. That’s why founders should know how to read, understand, and explain it—without having to phone their accountant every time someone asks.
The Nuts and Bolts: What’s On a Balance Sheet?
Let’s break it down. You’ll see three main parts: assets, liabilities, and equity.
Assets are what your business owns. They’re usually split into two groups. Current assets are things you expect to use or turn into cash within a year—like cash in the bank, accounts receivable, or inventory on hand. Non-current assets, sometimes called long-term assets, stick around longer. Think property, equipment, or anything you can’t quickly convert into cash.
Liabilities are what your business owes. Current liabilities have to be paid within a year—stuff like unpaid bills, short-term loans, or payroll taxes owed. Long-term liabilities are debts you’ll pay off over a longer period, like bank loans or bonds.
Then comes equity. This is what the owners have invested in the business, plus any profits kept in the company (rather than taken out as dividends or salary). You’ll often see it labeled “shareholders’ equity.”
How Do You Read One?
Don’t overthink it. The top part lists assets—usually with cash up front, then other current assets, then fixed or non-current assets at the bottom. Underneath or beside that is liabilities, usually with current ones at the top. Then, finally, you’ll see equity.
The basic structure is always the same: assets on one side, balanced by a mix of liabilities and equity on the other. That’s why it’s called a “balance” sheet. Everything adds up, because every dollar your company has came from somewhere—debt (liabilities) or investments/profits (equity).
When you read a balance sheet, you’re trying to answer questions like: Does the company have more cash than unpaid bills? Is it carrying lots of debt? Did profits grow last year, or did it shrink?
What Does a Balance Sheet Really Tell You?
Plenty. Say you need to pay for a last-minute software license. Look at your current assets and current liabilities. If your current assets are much higher than your current liabilities, you’re probably safe. That’s called liquidity—the ability to cover short-term costs.
Now, check long-term liabilities versus total assets. If you owe more than you own, that’s a warning sign. That’s leverage—the amount of debt you’re using in proportion to your assets. If you’re funding growth by borrowing, make sure you can handle it if sales drop.
Equity tells you how much of the company the owners actually “own,” either from their initial investment or from profits kept in the business. A growing equity number often signals long-term strength and profitability.
Looking Deeper: How Accountants Compare Balance Sheets
Accountants love to look at changes from one period to the next. Two of their favorite tools are comparative balance sheets and financial ratio analysis.
With comparative balance sheets, you’ll see two or more periods side by side. That way, you can check what’s changed, and spot trends like rising debt or falling cash.
Analysts also use “vertical” analysis—showing each line item as a % of total assets—or “horizontal” analysis, examining changes period-over-period. You don’t have to get fancy with charts to do simple checks. If you see cash dropping, or payables rising, it’s a sign to ask more questions.
How Do Founders Use Balance Sheets in Real Life?
Planning your next move, or thinking about raising money? The balance sheet is part of every real discussion with investors, banks, or partners. They want to know: Are you in a strong position? Will you be able to pay them back? Have you invested your own money? Any warning signs?
If you’re considering a big expense—like hiring staff or buying equipment—the balance sheet helps you see if you can actually afford it without hurting day-to-day operations.
Some founders use balance sheets to guide growth targets or set spending limits. When the numbers shift suddenly, it’s often the first sign that something operational, like receivables piling up or costs spiking, needs a closer look.
Basic Steps to Build and Maintain One
Creating a balance sheet isn’t just about filling in blanks—it’s about knowing what your numbers are telling you.
First, go line by line. List your assets at their current value (what you could actually get for them right now). List out your liabilities (bills, loans, promises to pay). Then subtract what you owe from what you own; the difference is equity.
Keep it updated. Every time you get paid, take on new debt, buy equipment, or withdraw cash, adjust the numbers. Lots of founders start with a spreadsheet. As you grow, it might make sense to move to accounting software.
Some companies update their balance sheet every quarter, others do it monthly. Find a rhythm that matches your pace. The key is not just to update the numbers, but to actually look at them and ask what’s changing.
Common Pitfalls and Misunderstandings
It’s easy to look at the asset number and feel good, but sometimes those numbers aren’t as straightforward as they seem. For example, the value of your equipment on paper may be much higher than its fair market value. Or maybe you’re counting inventory that’s obsolete and will never sell.
Then there are off-balance-sheet items. These are contracts or obligations that aren’t listed on the balance sheet but could impact your finances. Lease agreements or pending lawsuits fall into this category. Some founders overlook these, which can make things look healthier than they actually are.
Don’t forget: Bookkeeping mistakes can snowball. Small errors in recording transactions today might create big headaches when you need to raise funds or report taxes later on.
Better Tools, More Support
Manual spreadsheets are fine when it’s just you and a tiny team. But as things grow, tracking current and non-current positions gets complicated fast.
There’s a bunch of accounting software tools out there—like QuickBooks, Xero, or FreshBooks—that help automate updates, generate reports, and even spot trends. Some platforms include forecasting and alerts for things like cash flow warnings.
If your business is getting more complex, don’t be afraid to reach out for help. Many founders work with a bookkeeper or accountant for regular checkups, especially before fundraising rounds, tax season, or big spending decisions.
You’ll find plenty of advice and resources online, too. For a deeper look at financial statements in founder-speak, check out sites like Hyderman. They break down business topics in a founder-friendly way that goes way beyond textbook language.
Why the Balance Sheet Still Matters
The balance sheet shouldn’t be something you dread or leave to someone else. It’s a simple scorecard, a check on your assumptions, and a way to keep surprises at bay.
When you know what’s on your balance sheet—and what each number means—it gets much easier to talk with investors, spot issues, and set practical goals. No need for drama or hype. It’s just about being clear-eyed about where you stand.
Staying on top of your balance sheet, month by month, helps you spot trouble early and make decisions with confidence. Even if your business is changing fast, a regular check-in is one of the easiest ways to stay grounded in the real numbers.
So the next time somebody asks, “How’s your balance sheet?” you can give a direct answer—and make decisions that actually fit your business, not just the textbook version.