The Purpose of a Balance Sheet in Business Growth

May 20, 2026 | By Sarah Jenkins, CPA

Financial balance concept with stock charts

Most business owners are obsessed with the Profit & Loss (P&L) statement. "Did we make money this month?" is the only question they ask.

While the P&L tells you if you are making money, the Balance Sheet tells you if you will survive. It is the "Health Scorecard" of your business at a specific moment in time. If you want to grow, get a loan, or sell your business, the Balance Sheet is the report that matters.

1. The Formula: Assets = Liabilities + Equity

The Balance Sheet must always balance. It answers three questions:

Assets: What do you own? (Cash, Equipment, Unpaid Invoices).
Liabilities: What do you owe? (ATO debt, Loans, Unpaid Super).
Equity: What is left over for you? (The net value of the business).

If your Liabilities are higher than your Assets, you have Negative Equity. This means the business is technically insolvent, even if you made a "profit" on paper this month.

2. Working Capital (The Growth Fuel)

Growth costs money. You need to buy stock or hire staff before you get paid by clients. This gap is bridged by Working Capital.

Calculation: Current Assets (Cash + AR) minus Current Liabilities (AP + Tax due within 12 months).

If this number is negative, you are in a "Liquidity Crunch." You cannot afford to grow because you are struggling just to pay today's bills. Monitoring this ratio on your Balance Sheet is the best early warning system for bankruptcy.

3. What Banks Look For

When you apply for a business loan, the bank barely glances at your P&L. They stare at your Balance Sheet.

They are looking for the Debt-to-Equity Ratio. If you have $100,000 in assets but $95,000 in debt, you are "highly leveraged." A bank will view you as high risk. To get funding for growth, you need to build a strong Balance Sheet by retaining profits rather than stripping all the cash out as dividends.

Red Flag: A common error we see is "Director Loans." If you take money out of the company for personal use without declaring it as wages, it sits as an Asset on the Balance Sheet. The bank knows this isn't real cash, and the ATO will tax you on it (Div 7A).

Does your Balance Sheet look messy?

If you see negative numbers or "Unreconciled" lines on your Balance Sheet, your financial data is unreliable. We can clean up your historical data so you can make decisions with confidence.

Book a Balance Sheet Review

Summary

You can be profitable and still go broke. The P&L is your speed; the Balance Sheet is your fuel gauge. You need to check both to finish the race.