Understanding Your Balance Sheet
Business owners often focus on how much money is in the bank. And fair enough, it’s an important figure. But your bank balance doesn’t tell the full story.
To really understand how your business is going, you need to look at the bigger picture. That’s where your financial reports come in. And one of the most important reports to get your head around is the balance sheet.
Let’s walk through understanding your balance sheet, what it is, what it tells you, and how it connects with the rest of your business performance.
What the balance sheet tells you
Your balance sheet, sometimes called a statement of financial position, gives a snapshot of your business’s financial position at a specific point in time. It works alongside your profit and loss and cash flow reports to show what your business owns, what it owes, and the value left over.
When your bookkeeping is accurate and up to date, your balance sheet becomes a powerful tool. At First Class Accounts Ovens & Murray, we make sure your reports are reliable, easy to access, and actually make sense, so you’re not second-guessing the numbers.
Assets – what your business owns
Assets are everything your business owns or is owed. That includes your bank accounts, unpaid customer invoices, stock, equipment, vehicles, property, and even things like intellectual property or prepaid expenses.
Some assets are more short-term, like money in the bank or invoices due to be paid soon. Others are long-term, like a company vehicle or a commercial lease bond.
If you’re using accounting software like Xero, we’ll help set things up so your assets are correctly tracked. We also work with add-ons like inventory and project management tools to make sure everything feeds cleanly into your reports, giving you a clear picture of what’s sitting on your books.
Liabilities – what your business owes
Liabilities are your unpaid bills and upcoming obligations. This includes supplier invoices you haven’t paid yet, employee wages, super, tax, loans, and even deposits from customers for work you haven’t done yet.
Keeping on top of these is vital to avoid cash flow problems and ATO penalties. That’s why we look after all your payroll processing, STP reporting, super payments, and ATO lodgements. We also help you plan ahead, so you’re not caught short when quarterly or annual obligations roll around.
Equity – what’s left over
Equity is the part of the business that belongs to you. It’s what’s left once you take away everything you owe from everything you own. It includes the money you’ve put into the business, any retained profits, and drawings or dividends.
As you grow your business and earn profit, your equity increases. If you make a loss or draw money out, it decreases. Understanding how this figure changes over time can help you track long-term progress, especially when it comes to reinvesting or planning for growth.
We take the guesswork out of these figures. Our monthly reporting and real-world advice help you understand the impact of your business decisions and make better ones going forward.
The balance sheet equation
Assets = Liabilities + Equity. That’s the core formula.
It always has to balance. If it doesn’t, there’s an error somewhere that needs to be fixed. For example, if you buy a vehicle for $80,000 using a $20,000 deposit and a $60,000 loan, your asset value goes up by $80,000, your cash decreases by $20,000, and your liabilities increase by $60,000. Both sides of the equation remain balanced.
If your balance sheet isn’t balancing, or you’re not confident the figures are correct, we can help. Our catch-up and cleanup work gets everything sorted and reconciled, so you can trust what you’re looking at.
But it’s not your market value
It’s worth noting that the equity figure in your balance sheet doesn’t reflect the market value of your business. Your assets are recorded at their original purchase value (less depreciation if applicable), not what they’d sell for today.
That means your business might be worth more (or less) than what your balance sheet says. Market value also considers things like goodwill, customer relationships, future earnings, and brand reputation, which don’t appear on the balance sheet.
If you’re planning to sell, expand, or apply for finance, we can work with your accountant to make sure you’ve got the full picture.
Let’s make your numbers mean something
The balance sheet can be one of the most misunderstood reports in business. But once you understand how it works, and how it links in with your other reports, it becomes one of the most useful.
At First Class Accounts Ovens & Murray, we don’t expect you to be a financial expert. That’s our job. We give you accurate, consistent reporting and explain what the numbers mean, so you can feel more in control and make better decisions for your business.
If you’re looking for a bookkeeper or payroll specialist in Albury Wodonga who keeps things running behind the scenes and helps you stay across your financial position, we’re ready when you are. Get in touch.