The balance sheet is one of the key financial statements that you should review regularly—at least once a month.
Balance sheet definition
Your balance sheet shows the current financial state of your company and summarizes what you own (your assets), what you owe (your liabilities), and the money you’ve invested into your business, plus profits (your equity).
Unlike the other two primary financial statements (your profit and loss and cash flow statement) which span a period of time such as a month, quarter, or year, the balance sheet tells you how your business is doing at a specific point in time.
Having an accurate balance sheet is fundamental to every business. It is the primary document an investor or lender will want to see to understand your business’s health and value. When you review it regularly, it also provides some key information that will help you make better strategic spending and growth decisions.
Balance sheet formula
The balance sheet always has to balance—as the name suggests—with assets (like cash and inventory) on one side, and liabilities (like accounts payable) and equity on the other.
The formula for every balance sheet is:
Assets = Liabilities + Equity
Balance sheet analysis: How to read and understand it
Regularly reviewing your balance sheet—also called balance sheet analysis—will help you spot potential cash issues, and understand the state of your business’s investing and financing activities, whether you’re seeking funding from lenders or investors, or you’re trying to make smart growth decisions.
There are also a number of useful ratios you can pull from balance sheet data that help you gauge your cash on hand against your financial obligations, and help you compare your business’s health with industry benchmarks.
To learn more about what a balance sheet is and what it can tell you about the current state of your business, check out this article: What Is a Balance Sheet, and How Do You Read It?