General business finance

Understanding your balance sheet

It takes a bit of time to figure out – but when you understand your balance sheet, you understand your business. This guide explains what a balance sheet is, what it tells you, and how you can use it to manage your business better.

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Why your balance sheet is important

Your balance sheet is one of two major financial statements your business will produce (the other is your profit and loss statement, or P&L). Many business owners find the balance sheet hard to understand and interpret – but once you get the basics, it can give you valuable information about your business and help you manage it better.

Balance sheets are also used by potential lenders and investors to help them decide whether to support your business, so it pays to be familiar with them.

Your balance sheet is closely related to your P&L, so we recommend reading our article about understanding your profit and loss statement along with this guide.

A snapshot of the health of your business

In simple terms, a balance sheet is made up of three components:

  1. What the business owns — its assets.
  2. What the business owes — its liabilities.
  3. The overall value of the business — its assets minus its liabilities. This is known as the owner’s equity (it’s also sometimes referred to as the ‘book value’ of a business).

The purpose of the balance sheet, as its name suggests, is to balance these. That’s why the bottom line figures on a balance sheet must always match each other. This is known as ‘the accounting equation’: 

Assets = Liabilities + Owner’s equity

The simple example below illustrates this.


Current Assets 

Cash: $15,000

Accounts receivable: $20,000

Inventory: $30,000

Total Current Assets: $65,000


Fixed Assets 

Equipment: $100,000 

Total Fixed Assets: $100,000  


Total assets: $165,000


Current Liabilities

Accounts payable: $9,000

Bank overdraft: $11,000

Total current liabilities: $20,000


Long-term liabilities

Loan payable: $25,000

Total long-term liabilities: $25,000


Owner's equity: $120,000


Liabilities + owner's equity: $165,000

Understanding assets and liabilities

While some accountants or accounting packages may use slightly different terms, you’re likely to see the words ‘assets’ and ‘liabilities’ on your balance sheet. Here’s a simple explanation of what they mean.

About assets

Assets can be ‘current’ or ‘fixed’. Some of the assets you create can’t be easily counted, such as your brand, reputation, and any trademarks. While important, these aren’t included on your balance sheet.

Current assets 

These are things you own that last less than 12 months and that you can convert into cash fairly quickly. Current assets include cash, inventory or stock (the things you have for sale), and the money owed by customers (accounts receivable).  Money in your business bank account is another current asset.

Fixed assets 

Sometimes known as ‘non-current’ assets, these are things you own that will last longer than 12 months. Examples include equipment, buildings, vehicles, and machinery.

About liabilities

Liabilities can be ‘current’ or ‘long-term’.

Current liabilities 

These are amounts you owe that you will have to repay within 12 months. Outstanding invoices (accounts payable) and taxes are examples of current liabilities.

Long-term liabilities

These are amounts you owe that you pay over a longer period. They include things like loans, business mortgage payments, and lease payments for equipment or vehicles.

Using your balance sheet

Balance sheets aren’t admin for admin’s sake. Your balance sheet can help you understand the health of your business.  For example, you can compare your latest balance sheet with earlier ones to check whether your business is getting stronger or weaker.

In particular, you can use the information in your balance sheet to calculate key ratios that you can compare against industry benchmarks or past performance to identify and fix potential issues in your business. For example, checking key ratios can help you answer questions like:

  • Are you making enough margin?
  • Is your stock turning over fast enough?
  • How efficient is your business?
  • Do you have enough cash to pay your bills when they come due?

To learn more about how to use the information in your balance sheet to manage your business better, read our guide about checking the health of your business.

The difference between your balance sheet and your P&L

Your balance sheet is a snapshot of your business and its overall health at a particular point in time. It contains information you can use to measure many different aspects of your business. 

Your profit and loss statement (P&L) measures your profitability over a certain period (e.g. a month or a year). It helps you to identify trends that can impact your profit.


Your accountant would typically produce a balance sheet once a year, but accounting packages now allow you to produce one any time you like. This can help you keep a close eye on how your business is performing, and identify and fix issues quickly when they develop.

So, next time you receive or produce a balance sheet, don’t put it in a drawer and forget about it. Taking the time to understand and review it, can help you build a better, stronger business – and a healthier bottom line.

How to prepare your financial statements

Learn about the two main financial statements for your business: the Balance Sheet and the Profit and Loss Statement, and how to calculate some key finance ratios like profitability, business efficiency, or business liquidity ratios.

Contact an ANZ Business Specialist

Our specialists understand your kind of business and the challenges you face as a business owner. We can help you figure out how to make your business grow and succeed.

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Important information

We’ve provided this material as a complimentary service. It is prepared based on information and sources ANZ believes to be reliable. ANZ cannot warrant its accuracy, completeness or suitability for your intended use. The content is information only, is subject to change, and isn’t a substitute for commercial judgement or professional advice, which you should seek before relying on it. To the extent the law allows, ANZ doesn’t accept any responsibility or liability for any direct or indirect loss or damage arising from any act or omissions by any person relying on this material.

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