If you’re looking to grow your business, apply for financing or bring on investors, there’s one financial statement that can tell your story at a glance — your balance sheet.
A strong balance sheet doesn’t just make your accountant happy. It shows that your business is financially healthy, stable and ready for whatever the market throws at it. Here’s how to read it and five ways to make yours stronger this year.
What your balance sheet actually shows
Your balance sheet — also known as a statement of financial position — is a snapshot of your business at a specific point in time. It shows:
- Assets: what you own (cash, receivables, inventory, equipment, investments)
- Liabilities: what you owe (credit cards, loans, taxes, payroll, accounts payable)
- Equity: what’s left over after you subtract what you owe from what you own
Assets – Liabilities = Shareholders’ Equity
That final number, equity, represents your ownership stake in the business. The stronger your equity position, the stronger your business.
An ideal balance sheet has more current assets than current liabilities, healthy receivables, and a manageable amount of debt. It tells lenders and investors you’re solvent — meaning you can pay your bills and still have room to grow.
How to check your financial health
Think of your balance sheet like a wellness check-up for your business. A few simple ratios can tell you whether things are in good shape or if you might need a tune-up.
1. Current ratio
This is your liquidity check — how much you have available to cover your short-term obligations.
Current assets ÷ Current liabilities = Current ratio
If your ratio is 2:1, that means you have $2 in cash or receivables for every $1 you owe in the near term. That’s a good sign. A ratio below 1:1 could mean you’re stretched too thin.
2. Debt coverage ratio
This one looks at how much “ready cash” you have if creditors came knocking.
(Current assets – inventory) ÷ Current liabilities = Debt coverage ratio
Ideally, this number should also be above 1. If it dips below, you might be holding too much inventory or relying too heavily on credit.
3. Debt-to-equity ratio
This ratio measures how much of your business is financed by debt versus your own investment or retained earnings.
Liabilities ÷ Shareholders’ equity = Debt-to-equity ratio
A high number means you’re more leveraged — which can increase risk if sales slow down or interest rates rise.
Five ways to strengthen your balance sheet
Once you understand where you stand, it’s time to take action. Here are five practical ways to build a healthier, more resilient balance sheet.
1. Move slow inventory faster
Stale inventory ties up cash that could be used elsewhere. Take a look at what’s not moving — can you discount it, bundle it with bestsellers or stop ordering it altogether?
You can even write off slow-moving stock at the right time of year to clean up your books. The faster you turn over inventory, the more efficient your business will be.
2. Improve your debt-to-equity ratio
There are two ways to strengthen this ratio: increase sales or reduce debt.
Boosting revenue may take time, but you can make an immediate impact by selling underused assets like extra equipment, vehicles or real estate and using the proceeds to pay down debt.
A lower debt load improves your creditworthiness and positions you better for future growth or financing opportunities.
3. Cut unnecessary spending
Improving your balance sheet isn’t just about making more money — it’s about spending smarter.
Take a look at where your money goes each month. Could you negotiate better terms with suppliers? Trim software subscriptions you rarely use? Outsource tasks that are eating up payroll hours?
Even small savings can add up. Streamlining your overhead means more cash stays in the business — strengthening your asset base and giving you more breathing room.
4. Build your cash reserves
Cash is king — and having a safety cushion makes all the difference when things get unpredictable.
Aim to set aside a portion of your profits each month into an emergency fund. A good rule of thumb is to keep at least one-third of your available cash untouched. That way, you’ll have funds ready for unexpected expenses — or to jump on new opportunities when they arise.
5. Stay on top of accounts receivable
Unpaid invoices can choke your cash flow. If your receivables are piling up, tighten up your collection process.
Make sure your invoices are clear, accurate and sent promptly. Use accounting software to track what’s outstanding, and don’t be afraid to follow up. The longer an invoice sits unpaid, the less likely it is to be collected.
Building your own balance sheet
If you haven’t looked at your balance sheet in a while — or ever — it’s worth creating one. Here’s the basic process:
- Pick a date. Most businesses use their fiscal year-end.
- List your assets. Include everything your business owns that has value.
- List your liabilities. Include debts, bills, and other obligations.
- Calculate equity. Subtract liabilities from assets to find your equity.
- Check your balance. Assets should equal liabilities plus equity.
If you’re a sole proprietor, you might not need a balance sheet since your business and personal finances are considered one and the same. But if you’ve incorporated, it’s a must-have for understanding your financial position.
A quick word on retained earnings
Retained earnings show how much profit your company has built up over time — after paying expenses, taxes and dividends. They appear in the equity section of your balance sheet and can be reinvested in your business for growth.
Many small business owners use retained earnings to buy new equipment, invest in marketing or increase working capital. It’s a good sign when this number grows year after year — it means your business is creating lasting value.
Get insights that matter to your business
Your balance sheet can tell you a lot — but only if you know how to read it. Depending on your goals, you might want to prepare it monthly, quarterly or annually to spot trends early and make smarter decisions.
At True North Accounting, we help small business owners understand what their numbers are saying, so they can build stronger businesses with confidence.
If you’d like a hand reviewing your balance sheet or creating a plan to strengthen it, book a meeting with one of our CPAs. We’ll walk you through the numbers, explain what they mean and help you chart a course for growth.
Need a refresher on small business accounting terms? Check out our other Bookkeeping topics — they’re written for real business owners, not accountants.
