How to Understand Your Balance Sheet

If the balance sheet feels like the quiet, mysterious sibling of the profit & loss report… you're not alone. Most business owners skim it, nod confidently, and hope no one asks questions.

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But the balance sheet is actually one of the most powerful financial tools you have. It tells you what your business owns, what it owes, and what’s truly yours. Think of it as your business’s financial “snapshot” — a single moment frozen in time.

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1. The Balance Sheet Equation (The Only Thing You Really Need to Remember)

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Every balance sheet in the UK — whether you’re a sole trader, Ltd company, or multinational — runs on one simple rule:

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Assets = Liabilities + Equity

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Or, put another way:

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What your business owns, What your business owes + your stake in the business

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If it doesn’t balance? Something’s wrong — and your accountant is crying.

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2. Assets: The Stuff You Own (And the Stuff Owed To You)

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Assets are divided into two buckets:

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Current Assets

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These are things you’ll use or convert into cash within 12 months:

• Cash in the bank

• Accounts receivable (customers who owe you money)

• Inventory

• VAT refunds due

• Prepayments (insurance, software subs, etc.)

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Non-Current Assets

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These stick around for the long haul:

• Equipment

• Vehicles

• Office furniture

• Property

• Long-term investments

• Intangibles (like goodwill)

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Pro tip: If you want a quick pulse check, look at current assets vs current liabilities. If current liabilities are much higher… cash flow danger might be lurking.

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3. Liabilities: The Stuff You Owe

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This is where your obligations live.

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Current Liabilities

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Due within 12 months:

• Trade creditors

• VAT payable

• PAYE/NI

• Short-term loans

• Credit cards

• Accruals

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Long-Term Liabilities

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Due after 12 months:

• Bank loans

• Asset finance

• Directors’ loans owed by the company to you

• Deferred tax

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If liabilities balloon faster than assets, you’re building a business on sand. Not ideal.

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4. Equity: What’s Actually Yours

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For a Limited Company, equity includes:

• Share capital

• Retained earnings (your accumulated profits)

• Director loan owed to you

• Other reserves

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Here’s the truth most businesses miss: Retained earnings = the real number that shows if your business is actually building wealth.

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Your profit & loss shows how you performed. Your retained earnings show the long-term results.

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5. The Three Quick Tests Every UK Business Owner Should Run

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1. Liquidity Check: Can you pay your bills? Current Assets ÷ Current Liabilities - Aim for above 1.2 for comfort.

2. Solvency Check: Are you over-leveraged? Total Liabilities ÷ Total Assets. Anything above 0.7 warrants attention.

3. Stability Check: Are you actually building equity? Compare retained earnings year-on-year. If it’s consistently rising — well done, you’re playing the long game.

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6. Balance Sheet Red Flags (That We See All the Time)

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• Large director loan owed to the company → This can trigger tax problems if you’re not careful.

• High receivables (customers taking too long to pay) → Cash flow killer.

• Negative retained earnings → You may be trading at a loss without realising.

• Assets that are outdated or overvalued → Can distort the true picture.

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Most of these issues are fixable — but only if you know they’re there.

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7. Why the Balance Sheet Matters (More Than You Think)

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Banks look at it before approving finance. Investors analyse it to assess risk. HMRC can spot inconsistencies instantly.

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You should use it to:

• Plan cash flow

• Assess growth potential

• Understand funding needs

• Decide how much you can safely draw from your company

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Your balance sheet is basically your business’s financial résumé — keep it clean and credible.

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Want a Balance Sheet Walkthrough for Your Business?

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At Xenith Wealth, we help business owners understand their numbers without the jargon.

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If you want:

• A personalised balance sheet review

• A cash flow health check

• Or someone to explain your accounts in normal human language

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Just say the word. Contact us!

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info@xenithwealth.co.uk