What is the purpose of a balance sheet?

When you're running a small business, keeping track of your finances is essential—not just for tax time, but for managing day-to-day operations, planning for the future, and securing funding when you need it. 

One of the most important financial statements to understand is your balance sheet, which gives you a clear snapshot of your business’s financial health at a specific point in time. Let’s break down what that really means, why it matters for SMEs, and how you can use it to make smarter business decisions.

What is a balance sheet?

A balance sheet, also known as a statement of financial position, is a financial report that shows what your business owns, owes, and what is left for the owner (or owners) at a particular moment in time [1]. It consists of three main sections: Assets - Liabilities = Owner's equity.

1. Assets

Assets are items or resources of value that your business owns, and they can be:

• Current: Short-term resources that can be quickly liquidated, usually in a year or less. They allow you to cover immediate needs and can help pay for ongoing business expenses. Examples include cash (and cash equivalents), accounts receivable, inventory, and prepaid expenses like insurance.
• Non-current or fixed: Long-term investments that you use in running your business and that inadvertently help you create profit. These are not easily converted into cash and are typically used for future needs. Examples include property or commercial real estate, equipment and machinery, leasehold improvements, and intangible assets (like patents or trademarks).

2. Liabilities

The second part of a balance sheet is liabilities. These are your company’s financial obligations—what your business owes to others. Similar to assets, liabilities can be:

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• Current: Short-term debts that are due within one year, such as accounts payable, wages and taxes payable, and short-term loans.
• Non-current or long-term: Debts that you're not expected to settle for at least a year, such as business loans, equipment financing, and deferred tax liabilities.

3. Owner’s equity

Owner's equity (or shareholder's equity, in the case of corporations) is the net value of the business after subtracting liabilities from assets. It represents the owner’s share in the company and may include capital invested by the owner, retained earnings (that is, profits kept in the business rather than paid out), money withdrawn by the owner, and losses generated by the business.

Why balance sheets matter for SMEs

Understanding your balance sheet can give you a clearer picture of where your business stands and where it's headed.

It provides a snapshot of a company's financial health

A balance sheet gives you a bird’s-eye view of where your business stands financially. You can instantly see how much cash you have, how much you owe, and how much your business is worth— crucial information when you're making strategic and financial decisions.

For instance, if your current liabilities are higher than your current assets, you may not have enough short-term resources to cover immediate expenses—think rent or suppliers—on time. In this case, you may need to delay payments (not ideal, as it can hurt supplier relationships) or seek finance through a business line of credit.

On the flip side, more assets than liabilities indicates sustainability and a healthy equity position. You've paid off all your debts and have capital left over, so it may be a good time to expand or invest.

It strengthens your access to financing

If you're seeking funding to take the next step in your SME journey, you need to be prepared for lenders to request financial evidence that your business can manage the responsibility—and that includes your balance sheet. 

A strong balance sheet with a healthy debt-to-equity ratio and positive working capital signals that your business is financially sound and stable. You've built up equity over time and are not drowning in debt—which are both strong indicators that you'll be able to meet your repayments without defaulting.

The stronger your balance sheet, the lower the risk for the lender and, as a result:

• The more you can borrow
• The better the interest rates or repayment terms you can secure
• The less collateral you may need to provide

It helps you meet your tax obligations

Come tax time, your accountant will need your balance sheet to accurately prepare your financial statements, and there are a few reasons why. As you know, your balance sheet includes your business's liabilities, including tax-related ones such as GST payable, PAYG withholding, and superannuation obligations. This helps ensure nothing gets overlooked when calculating what you owe.

Your balance sheet is also essential for preparing other key documents like your BAS, FBT return, and income tax return. Plus, it supports certain tax deductions to reduce your tax bill, like depreciation on business assets.

Lastly, your balance sheet helps you assess whether you have enough liquidity to pay your tax bills or may need to adjust your cash flow.

It allows you to track business growth over time

By comparing balance sheets from different periods—say, quarterly or annually—you can clearly see how your business is evolving, spot trends in performance, and, if necessary, adjust your strategy.

You can track your equity over time to make sure the value of your business is increasing, you're building long-term wealth, and you're managing debt responsibly. You can also monitor asset growth, track increases over time, and confirm you’re building income-generating assets.

Common balance sheet mistakes to avoid

Even a small error on your balance sheet can give you a misleading picture. Here are five common mistakes to avoid:

• Overstating or understating assets. Overstating can mislead lenders and investors by making your business look more valuable than it is (which will likely come back to bite you), whereas understating could make you miss out on deductions. Be sure to review your assets regularly to confirm it all looks correct.
• Forgetting liabilities. It's easy to leave out small debts or ones that aren't immediately due, but this overstates your equity and can lead to cash flow problems if you forget to plan for upcoming payments. Remember to record all debts and consider reviewing them with your accountant from time to time.
• Mixing business and personal expenses. Combining personal purchases with business expenses makes your balance sheet inaccurate and can raise red flags with the ATO. It's a good idea to have a dedicated business bank account and keep your personal finances separate.
• Not aligning with your income and cash flow statements. Your balance sheet should be reviewed alongside your profit and loss (P&L) and cash flow statements to get a full picture of your business’s financial position. Though it might seem like a lot of paperwork, reconciling all reports at the same time will help you avoid inconsistencies and spot errors you could have otherwise let slip.
• Not updating regularly. A balance sheet is only useful if it’s kept current, yet many businesses only update it at tax time. Establishing a cadence (monthly or quarterly) instead gives you an accurate view of your financial position and prevents you from making decisions based on outdated or misleading data.

Balance sheet FAQs

Q: How often should I update my balance sheet?

We recommend updating it monthly or quarterly so you always have up-to-date to support budgeting, planning, and securing finance.

Q: What’s the difference between a balance sheet and a P&L statement?

A balance sheet shows your assets, liabilities, and equity at a single point in time, while a P&L statement shows your income and expenses over a period of time. 

Q: How can I use my balance sheet to secure funding?

You can use your balance sheet to show financial stability, demonstrate healthy working capital, and support your loan application with solid data.

Considering a business loan to grow your operations, manage cash flow, or invest in new opportunities? Valiant can help. Our platform compares loans from over 90 lenders to match you with ones that work with your unique needs. We handle the application from start to finish—so you focus on growing your business. Reach out today to get started.

References:

1. Set up a balance sheet | business.gov.au