A balance sheet provides a summary of your assets and liabilities - what your business owns or is owed, and what it owes.
The balance sheet shows how your business is being funded and how you are using these funds. There are three main ways you can use your balance sheet:
- for reporting purposes as part of a limited company's annual accounts
- to help you or investors, creditors or shareholders to assess the worth of your business at a given moment
- as a tool to help you analyse and improve the management of your business
Limited companies and limited liability partnerships must produce a balance sheet as part of their annual accounts.
A balance sheet should include:
- fixed assets - long-term possessions
- current assets - short-term possessions
- current liabilities - what the business owes and must repay in the short term
- long-term liabilities - including owner's or shareholders' capital
The figures in your balance sheet can change significantly in a short space of time. However, your total net assets (assets less liabilities) would only change significantly if your business was making large profits or losses.
There are some simple balance sheet comparisons you can make to assess the strength or performance of your business, including:
- internal and external comparisons, for example a comparison to a competitor's balance sheet
- trade debtors comparisons, for example as a percentage of your sales
- borrowing as a percentage of overall financing (gearing)