Balance Sheet

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:

1. Liquidity Assessment: Current ratio (current assets ÷ current liabilities) shows ability to pay short-term obligations
2. Financial Leverage: Debt-to-equity ratio reveals how much debt finances the business
3. Asset Efficiency: Shows how effectively the company uses resources to generate revenue
4. 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.