Balance sheets explained: how to read one and what lenders look for

A balance sheet is a summary of a company’s assets, liabilities and capital at a given point in time. That is the British Business Bank’s definition, and the key words are “at a given point in time”: it is a photograph of one day, not a film of a year.

Assets are items of value the company owns. Liabilities are what it owes. Capital, often called equity, is what is left over for the owners once the liabilities are covered. Because every pound of assets is paid for either by someone the business owes or by its owners, the two sides always match. That is where the name comes from.

The balance sheet is one of the statements in a company’s annual accounts, alongside the profit and loss account, which looks at a period rather than a single date.

Assets = liabilities + equity is the equation every balance sheet follows. Rearranged, equity is assets minus liabilities, which is why it is sometimes called net assets.

The table works through the sum for an imaginary business. The numbers are round and made up to show the arithmetic, not a benchmark for any business.

If the equity figure does not equal total assets minus total liabilities, something has been left out or entered twice.

You read a balance sheet in three passes: what the business holds, what it owes and who ultimately funds it. Start with the date at the top, because everything below is true only on that day.

• Assets: check how much is cash or close to it, how much is money customers have yet to pay, and how much is tied up in stock or equipment.
• Liabilities: separate what falls due soon, such as supplier bills and tax, from what is repayable over years, such as a loan.
• Equity: see whether it is positive, and whether it has grown or shrunk compared with the previous year.

Always read it with the previous year’s figures beside it. A single balance sheet tells you where a business stands. Two tell you which way it is moving.

Current items are those expected to turn into cash or fall due within about a year, while long-term items last or run beyond that. The split matters because it shows whether the business can meet the bills arriving soon.

The British Business Bank describes liquidity as the ease with which a company’s assets can be converted into cash. Cash is the most liquid asset, a building the least. Our guide to working capital shows how current assets and current liabilities combine into one figure.

Lenders look at a balance sheet to judge whether a business can cover what it owes and how much of it is funded by debt rather than by its owners. Each lender sets its own criteria, so there is no single pass mark.

• Short-term cover: whether current assets comfortably exceed current liabilities.
• Existing debt: how much the business already owes, and whether it is growing faster than equity.
• Equity: whether the owners have left profit in the business or taken it all out.
• Quality of assets: how much of the total is cash and customer debts that are being paid, compared with stock that is slow to sell.
• Direction of travel: how each figure has moved since the year before.

The balance sheet is rarely read alone. A lender will usually look at the profit and loss account, bank statements and sometimes management accounts as well. Our guides to business loan requirements and why business loans get declined cover the wider picture.

The two checks most useful to a small business are the working capital ratio and the share of the business funded by debt. Both use only figures already on the balance sheet.

In the illustration, current assets are cash, customer debts and stock (£20,000 + £40,000 + £30,000). The British Business Bank says a working capital ratio below 1 indicates a business is very likely to have difficulty meeting its short-term liabilities. Beyond that, what counts as healthy depends on the sector, so compare your ratios with your own earlier years and with businesses like yours rather than a universal number.

A balance sheet shows financial position on one date, while a profit and loss account shows income and outgoings over a period. The British Business Bank describes the second as a statement showing the net profit or loss for that time.

A business can make a profit and still have a weak balance sheet, for example when the profit is owed by customers who have not paid. It can also hold a strong balance sheet built in earlier years while currently making a loss. Lenders want both, which is why a balance sheet that balances says nothing on its own about whether the business is making money. Our guide to the profit and loss account explains the other half.

Yes. A company’s accounts must generally include a balance sheet signed by a director on behalf of the board, with the director’s printed name. Companies House guidance sets out what else goes with it, such as notes to the accounts.

Private companies have 9 months after the end of the accounting reference period to deliver accounts to Companies House, and a late filing triggers an automatic penalty. As of October 2026, small companies and micro-entities can file without their profit and loss account, but from 1 April 2028 micro-entities must deliver a copy of it, with the option to opt out of publishing it on the register. Our guide on how to file company accounts walks through the process.

Capzy is a credit broker, not a lender, and is paid by the lender. We introduce businesses to lenders that suit the finance they need, and those lenders then assess the accounts and other information you provide.

If you want to see what is available, you can check your funding options with a soft search that does not affect your credit score. A full application to a lender may involve a hard search, and any offer is subject to status and lender criteria. You can also compare products in our directory of business lenders.