Balance sheets are one of the most under appreciated tools in your financial toolkit. Many business owners download this report at the end of the year, have a quick look, and tuck it away in a digital drawer.

I want to show you how to make the most out of this report, as I’m on a mission to make understanding your finances easy.

In this blog post I share a simple definition, show you how to download your balance sheet from Xero, and walk you through the areas I always review with my VIP clients.

What is a Balance Sheet?

A balance sheet is a financial report that summaries the financial state of your business at a point in time, e.g. the end of your financial year. When comparing one point in time to another it is usual to use the similar point – eg end of month, end of financial or calendar year.

Your balance sheet is one of a trio of resources that every business needs, the other two are a cashflow budget and a profit and loss statement. Together these reports provide an in-depth view of your business' overall financial performance.

How to download a Balance Sheet from Xero

To download your balance sheet follow these steps:

Step 1: in the top menu, click on Accounting (1), then choose Balance Sheet (2) from the drop-down menu.

Step 2: Click on the arrow beside the “Date” box and select your Date from the top menu.

Step 3: Click on the arrow beside the “Compare” box and choose Compare With 1 Year from the top menu. A drop-down menu will appear. Under Period, choose 1 Year. Under Period End, click Compare To End Of Financial Year. Then click on the blue Update button in the top right-hand corner.

Your balance sheet will look something like this:

How to Review your Balance Sheet

These nine areas are relevant to both a service based and a product-based business.

1. Current Assets

Current assets can be quickly converted into cash, e.g. money in the bank or accounts receivable. In the example above, there is a separate row for Bank, i.e. cash, and another row for Current Assets.

For this asset type we want to compare those amounts to the same period last year, and then look for major differences, as cash could be locked up within the business or a higher number of customers may not have paid you.

2. Accounts Receivable (or Debtors)

You want to pay attention to accounts receivable as it will show you if debtors need to be followed up or whether there are bad debts to write off. It’s good practise to do this review at the end of each month.

3. Fixed Assets

Fixed assets are purchased for long-term use (more than 12 months) and aren’t likely to be quickly converted into cash.

For this asset type we want to compare those amounts to the same period last year, and then look for any changes, e.g. has computer equipment been purchased, and has the correct rate of depreciation been applied?

4. Current Liabilities

Current liabilities need to be paid in the short term, usually in less than one year, e.g. accounts payable or GST.

For this liability type we want to:

· Ensure there is cash available to cover those liabilities.

· Compare those amounts to the same period last year, and then look for major differences, e.g. if GST is higher, does that make sense given the level of sales?

5. Accounts Payable (or Creditors)

By regularly reviewing your accounts payable you’ll be able to see if that are any bills that you haven't paid and know if there are any upcoming cashflow issues.

6. Long Term Liabilities (Non-Current Liabilities)

Long Term Liabilities are long-term debts, loans, bonds, or mortgages that typically exceed one year. In the example there is one loan taken out in the 2023 financial year.

For this liability type we want to compare those amounts to the same period last year, and then look for any changes, e.g. is your revolving credit facility going down instead of up? Do the changes make sense in terms of what is happening within your business?

7. Net Assets

Total assets minus total liabilities equals your net assets. The overarching goal is to have your total assets being more than your total liabilities, yet don't want your net assets to be growing too much. Instead, you want any surplus assets to either be invested in your business (if required) or taken out to add to your personal wealth.

8. Equity

Your net assets will equal your equity. Depending on your business within the equity there maybe Shareholders paid up funds, Dividends paid, or Sole trader drawings and Funds contributed. Also here you will see the Current Year Earnings which will match the Net Profit shown in your Profit and Loss. On simple Balance Sheets if all Assets were sold at recorded values and all Liabilities paid the Equity figure is generally what would be available for payment to owners.

9. Items that are out of place

One final area to check is for items that look out of place, as these will need investigation, e.g. if your super payable total is in brackets, it means that an item has been mis-coded or overpaid. In this example the Income Tax Payable is in brackets indicating that tax is being prepaid.

When reviewing your Balance Sheet use the cash balances to update your cashflow budget to make sure you are still on track in relation to cashflow.

Understanding your numbers can feel overwhelming, especially if you’re unsure which numbers are important. By getting into the habit of reviewing your balance sheet at the end of the month, you’ll quickly become familiar with your numbers and have the confidence that you have enough cash to pay your obligations, especially tax!

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9 Key areas to review in your Balance Sheet