If you're planning to grow your business, apply for financing or bring on investors, there’s one financial statement that tells your story better than any pitch deck — your balance sheet.
A strong balance sheet shows that your business is healthy, stable and ready for whatever comes next. Here’s what it actually shows, how to read it and the practical steps you can take to strengthen yours this year.
What your balance sheet actually tells you
Your balance sheet (also called a statement of financial position) is a snapshot of your business at a specific moment in time. It shows what you own, what you owe and what’s left over — your equity. In simple terms:
Assets – Liabilities = Net Assets (Equity)
A strong balance sheet has healthy receivables, manageable debt and more current assets than current liabilities. That tells lenders, investors and, most importantly, you, that the business is solvent and has room to grow.
How to check the health of your balance sheet
Trend analysis vs. ratio analysis
There are two main ways to understand whether your financial position is improving or slipping: trend analysis and ratio analysis.
Trend analysis looks at how your numbers change over time. It shows whether assets, liabilities and equity are growing or shrinking, and flags early warning signs — like cash decreasing while receivables or inventory climb. For example, if accounts receivable jump 25% but sales only grow 5%, that’s a collection issue. If debt rises sharply year over year, leverage may be getting risky.
Ratio analysis helps you understand the structure of your financial position right now. Ratios answer questions like: Do you have enough liquidity to cover your bills? Are your debt levels sustainable? Is the business generating cash or burning it?
1. Current ratio
This is your liquidity check — how much you have available to cover your short-term obligations.
Current assets divided by 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 divided by 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 divided by 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.
Using both trend analysis and ratio analysis gives you a clear picture: where you’ve been, where you are now and where things might be headed if nothing changes.
Five ways to strengthen your balance sheet
Once you understand the story your numbers are telling, it’s time to take action. Here are five practical steps to build a more resilient balance sheet this year.
1. Clean up your debt (especially the bad kind)
High-interest debt drains your cash and weakens your financial position. Operating lines of credit, credit cards, Buy Now Pay Later balances and interest-only loans should be paid down as quickly as possible. As a rule of thumb, aim to pay $0 in credit card and tax interest each year. If you’re paying interest, it’s a sign your cash flow management needs some attention.
2. Keep your tax accounts healthy
Tax debt can snowball faster than most business owners expect. Stay current on instalments and set aside a portion of every deposit for GST so you’re not caught off guard. Keeping your tax balances clean helps you avoid penalties, interest and the stress of scrambling at filing time.
3. Speed up your cash cycle
Healthy cash flow is the foundation of a strong balance sheet. A simple way to improve it: collect from customers faster than you pay your vendors. Send invoices promptly, follow up consistently and keep payment terms tight. On the flip side, use the full terms offered by your suppliers so you keep cash in the business longer.
4. Right-size your owner’s compensation
Your pay should match the size and stage of your business. If you pay yourself too much, your retained earnings and cash balances suffer. If you pay yourself too little, you might end up relying on personal debt — which eventually spills into your business. The right compensation level supports both your household and your company without straining either.
5. Build retained earnings and cash each year
Two numbers matter more than almost anything else on your balance sheet: retained earnings and cash. Positive, growing retained earnings mean your business is building real value over time. Strong cash balances give you flexibility — whether that’s handling an unexpected cost or jumping on a new opportunity. Even small, steady growth in these areas pays off.
Building your own balance sheet
If you haven’t looked at your balance sheet in a while — or haven’t created one before — it’s worth taking the time.
- 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.
Get insights that matter to your business
Your balance sheet can be one of the most powerful tools you have — but only if you check it regularly and understand what it’s saying. Whether you review it monthly, quarterly or annually, keeping an eye on trends and ratios helps you make smarter, more confident decisions.
At True North Accounting, we help small business owners decode their numbers and build healthier, more resilient businesses.
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.
