Quick answer
A balance sheet is a snapshot of what your business owns (assets), what it owes (liabilities) and what is left for the owners (equity) on one date. Read it in order: cash and debtors first, then stock and fixed assets, then short-term bills, then loans and director loans. Assets minus liabilities must equal equity, and the shape of the middle tells you how sturdy you are.
Key points
- A balance sheet is a photograph of one date, so compare it with the same date last year, not just the last report
- Business.gov.au separates current assets (convertible to cash within a year) from fixed assets, and the split drives most of the analysis
- Loans from or to directors are often the most revealing line on a small business balance sheet
- Lenders read negative equity, a large 'other debtors' balance and unpaid tax liabilities as the first red flags
- Assets minus liabilities equals equity, so every lender conversation about security begins here
The balance sheet is the report most owners skim and most lenders read twice. It’s easy to see why: a profit and loss statement tells a story of a year; a balance sheet is a single frame, taken at midnight on one date, of everything the business owns and everything it owes. There’s nowhere to hide in it.
That makes it useful to you too. Once you can read it, you can see whether your profit has turned into assets or leaked out into debt, whether the business is financed by its owners or by its creditors, and where a lender is likely to ask questions. This guide goes through it in the order your eye should travel.
What is a balance sheet showing me?
Business.gov.au describes it as your business assets (what you own) and liabilities (what you owe) on a particular date. The arithmetic is fixed:
Assets − Liabilities = Equity
Or, flipped, assets = liabilities + equity, which is why it’s called a balance sheet. Whatever the business owns was paid for either by someone it owes or by the owners.
Always check two things in the heading first. The date (and compare it with the same date last year), and whether figures are GST inclusive or exclusive, which business.gov.au says to state on the sheet.
What is in the assets section?
Assets are split into two groups, and the split is the first thing to look at.
Current assets are things you can turn into cash within a year or less:
- Cash at bank. The only asset that pays wages today.
- Accounts receivable (debtors). What customers owe you. Ask for an aged list; a balance that is mostly over 60 days is worth less than it looks.
- Stock. Valued at cost or at what it might sell for, whichever is lower. Slow-moving stock is the usual weak spot.
- Prepayments. Insurance or rent paid ahead. Real value, but not cash you can spend.
Fixed (non-current) assets are the things you use rather than sell: property, vehicles, equipment and fit-out. They normally appear at cost less accumulated depreciation, so the number is an accounting figure and not a valuation. A ten-year-old excavator may be worth much more than its book value, and a heavily customised fit-out much less.
What is in the liabilities section?
Same split, in reverse.
Current liabilities fall due within a year:
- Accounts payable (creditors). Unpaid supplier invoices.
- GST, PAYG withholding and super payable. Tax and super you’ve collected or accrued and not yet sent. These deserve a close look, because balances that grow over time are an early sign of cash stress.
- Accrued wages and leave. Wages earned but not yet paid, and accrued annual leave.
- Credit cards and overdrafts.
- The next twelve months of loan repayments.
Long-term liabilities are due after more than a year. This is where term loans, equipment finance and mortgages usually sit, with the portion due within twelve months moved up to current.
What is the equity section telling me?
Equity is what’s left. It typically has three parts: capital the owners put in, retained earnings (profits kept in the business over time) and, for companies, current-year profit, less any drawings or dividends.
Rising equity over several years means profits are staying in the business. Falling equity means losses or heavy drawings. Negative equity means liabilities exceed assets, and many lenders treat that as a flag that needs an explanation before anything else.
A worked example: reading a small trades business
An illustrative electrical contractor, as at 30 June.
| Assets | $ | Liabilities and equity | $ |
|---|---|---|---|
| Cash | 38,000 | Creditors | 41,000 |
| Debtors | 142,000 | GST and PAYG payable | 36,000 |
| Stock | 22,000 | Credit card | 9,000 |
| Vehicles and tools (net) | 96,000 | Vehicle loans (due this year) | 24,000 |
| Vehicle loans (later) | 58,000 | ||
| Director loan (owed to director) | 15,000 | ||
| Equity | 115,000 | ||
| Total | 298,000 | Total | 298,000 |
Current assets are 202,000. Current liabilities (creditors, tax, card and the loans due this year) are 110,000. Working capital is $92k and the current ratio is about 1.8, which looks comfortable.
Now read between the lines:
- Debtors are 70% of current assets. If a third of that is over 60 days old, the real picture is weaker. Ask for the aged list.
- Cash covers only about a third of current liabilities. If two large debtors pay late, the next BAS is tight.
- GST and PAYG payable of $36k is not an asset the owner can spend, however much of it is sitting in the bank.
- The director loan of $15k in the business’s favour is a quiet source of funding that a lender will want to know whether it can be called.
- Equity of $115k against a $298k balance sheet means owners fund about 39% of the assets. That is a sturdy position.
That is a healthy business with a collection risk. A fair next step is to run the cash flow ratios on the same numbers.
What do lenders look for on the balance sheet first?
Assessors work through a predictable list:
- Tax and super owing. Unpaid ATO balances jump out and can change the conversation, so deal with them before applying where you can.
- Related-party balances. Loans to or from directors, and loans to related entities.
- The debtor and creditor lists. Concentration in one customer, ageing and growth that outpaces sales.
- Net equity and trend. Is it growing, flat or shrinking?
- Existing debt. Total, type and the repayments due in the next twelve months.
- Asset quality. What is genuinely realisable, and what is security already pledged to someone else.
Your accountant can tidy the presentation, but not the substance. If you’re curious what else they usually send, our guide to what your accountant should send a lender lists it.
Wondering how your own balance sheet would be received? A short enquiry gets a person looking at it with you.
What can I do to strengthen it?
- Collect faster. Debtors turned into cash lift both the current ratio and your resilience.
- Clear slow stock so cash replaces something that was ageing.
- Pay tax and super on time. Keep GST and withholding in a separate account.
- Tidy director loan accounts with your accountant before they are reviewed by anyone else.
- Leave profit in the business where you can, since retained earnings are the cheapest funding there is.
The profit side is covered in how to read your profit and loss statement, and the two reports belong together: the P&L shows what you earned, the balance sheet shows where it went.
What if the balance sheet isn’t pretty?
Plenty of good businesses have untidy balance sheets: a heavy debtor book, an old director loan, a vehicle fleet bought on finance. None of that rules you out. It means the application should be explained, and that the right lender is one that looks at the whole picture rather than ticking a template.
If you’d like a person to take a look, our enquiry form takes about a minute. It doesn’t involve a credit check, so enquiring leaves your score as it is. Your details are not passed around a list of lenders; a specialist reads them and rings you to talk it through. Type in your figures as carefully as you can, as that lets us work out what’s likely to fit the first time.
Frequently asked questions
What is the difference between a balance sheet and a profit and loss statement?
A profit and loss statement covers a period and shows income less expenses. A balance sheet covers a single date and shows assets, liabilities and equity. One tells you whether you made money; the other tells you what the business is worth on paper and how it is financed.
What is equity on a balance sheet?
Equity is assets minus liabilities, the owners' share of the business on paper. It is made up of capital put in, plus retained profits, less drawings or dividends taken out. Negative equity means liabilities exceed assets, which lenders treat as a sign of financial stress.
What is a director's loan account?
It records money moving between a company and its directors. A credit balance means the company owes the director; a debit balance means the director owes the company. Large debit balances can attract tax consequences and lender questions, so ask your accountant how yours is treated.
What do lenders look for on a balance sheet?
Typically the mix and quality of assets, the size and timing of liabilities, outstanding tax and super, related-party loans and net equity. They often ask for two years of balance sheets plus a recent management version so they can see the trend and the current position.
Are the asset values on my balance sheet what the assets are worth?
Not necessarily. Most assets are recorded at cost less depreciation, so a vehicle or machine may be worth more or less than the figure shown. Property may be at purchase cost. For borrowing, a lender usually arranges its own valuation of any asset it takes as security.
How often should I look at my balance sheet?
Monthly or quarterly is plenty for most small businesses. Compare each date with the same date last year. A quick scan of cash, debtors, creditors and tax liabilities takes ten minutes and often reveals a problem well before it reaches the bank balance.