5 Things to Know About Your Balance Sheet

By Barbara Weltman
SBA blog | Originally Published September 19, 2019

Henry Ford said: “the two most important things in any company do not appear on its balance sheet: its reputation and its people.” Nonetheless, a balance sheet is an important financial statement for every business. Understanding what goes into a balance sheet and what it can tell you about your business is essential.

1. What a balance sheet is all about

A balance sheet is a statement of a business’s assets, liabilities, and owner’s equity as of any given date. Typically, a balance sheet is prepared at the end of set periods (e.g., every quarter; annually).

A balance sheet is comprised of two columns. The column on the left lists the assets of the company. The column on the right lists the liabilities and the owners’ equity. The total of liabilities and the owners’ equity equals the assets. To take the simplest example, say a company starts up by an owner who contributes $1,000 cash. The company has assets of $1,000, no liabilities, and owner’s equity (the owner’s contribution to the business) of $1,000, so both columns match up.

2. Debt ratio

The balance sheet presents a glimpse into how the company is doing financially. One of the key indices is the debt ratio, which is the ratio derived by comparing total debts to total assets. More precisely, divide total liabilities by total assets to obtain a percentage. For example, if a company has assets of $100,000 and debts of $55,000, the debt ratio is 55% ($55,000 ÷ $100,000).

If your assets can cover your debts, that’s fine, but it’s not advisable to have too much debt as compared with company assets. The larger the percentage (the debt ratio), the more the company is leveraged. This could present problems when a company is too heavily leveraged. The acceptable debt ratio varies according to industry.

3. Owner’s equity

In broad terms, owner’s equity is essentially what would be left for…[MORE]

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