Balance Sheets 101: What They Really Tell You

Introduction: Don’t Just File It—Understand It

Every year, thousands of South African business owners receive a neat set of financials from their accountants, scan through them quickly, nod politely—and then file them away. Among those pages sits a document that holds a quiet but powerful truth: the balance sheet.

It’s easy to overlook. It’s not as dynamic as the income statement or as immediate as a bank balance. But the balance sheet is where the real story of your business lives—how stable it is, how risky it feels to lenders, and how much of it you truly own.

Let me put it this way: your balance sheet is like a medical chart. It doesn’t just tell you how your business feels today—it shows you if it’s healthy enough to grow, weather a storm, or handle a shock. And just like you wouldn’t ignore your blood pressure or cholesterol, ignoring your balance sheet can lead to costly blind spots.

I remember working with a client in Durban who ran a successful catering business. Profits looked strong. Orders were coming in. But when we reviewed her balance sheet, something didn’t sit right—her liabilities far outweighed her assets, and the short-term debts were piling up quietly. What looked like a thriving business on the surface was in fact in a fragile position. The good news? She caught it early and made changes in time. But that insight only came from understanding the balance sheet.

If you’ve ever looked at one and felt lost—or simply filed it away without much thought—this article is for you. Let’s unpack what a balance sheet really tells you and how to read it with confidence.

What Is a Balance Sheet?

At its core, a balance sheet shows what your business owns, what it owes, and what’s left over for you—the owner. It’s a snapshot taken at a specific point in time, like a financial selfie that captures the exact state of your business on that day.

The structure is simple but powerful:

• Assets: Everything the business owns (from cash and inventory to buildings and vehicles)
  
  
• Liabilities: Everything the business owes (to banks, suppliers, SARS, etc.)
  
  
• Equity: What belongs to you as the owner after all debts are paid
  
  

This fundamental equation holds it all together:

Assets = Liabilities + Equity

In other words, every rand in your business is funded either by debt or by your own investment.

Think of it like owning a car. If the car is worth R200,000, but you still owe R80,000 on it, your equity is R120,000. That same concept applies to your business—on a bigger, more complex scale.

Why It Matters for South African Business Owners

Understanding this snapshot isn’t just about compliance—it’s about control. Let’s say you’re a small retail owner in Soweto. You’ve taken out a loan to expand your inventory, and you’re paying your suppliers late. Your profit and loss may still look decent, but your balance sheet could reveal warning signs: high debt, low liquidity, and shrinking owner equity.

Or maybe you’re a tech startup in Cape Town, preparing to pitch to investors. The first thing they’ll ask for? Your balance sheet. Why? Because they want to see if your business has assets, if you’re burning through cash, and if there’s value in what you’ve built.

A Note on Timing

Unlike your income statement, which tracks performance over a period (like a month or year), your balance sheet is a snapshot in time. It’s like checking the weather right now—it won’t tell you if it was sunny last week, but it does tell you whether to grab an umbrella today.

Breaking Down the Three Main Sections

To truly understand your balance sheet, you need to get comfortable with its three core components. These aren’t just accounting terms—they’re the story of your business told in three chapters: what you own, what you owe, and what’s yours to keep.

Let’s break them down in a way that makes sense, whether you’re running a bakery in Bloemfontein or a logistics company in Johannesburg.

1. Assets – What Your Business Owns

Assets are everything your business controls that has value. They’re usually split into two types:

• Current assets: Things you can turn into cash within 12 months — like money in your bank, customer invoices (accounts receivable), inventory, or prepaid expenses.
  
  
• Non-current assets: Long-term things that help your business operate — like vehicles, property, machinery, or intellectual property.
  
  

Why this matters:
A business might look profitable on paper, but if all its value is tied up in slow-moving stock or unpaid invoices, it can still struggle to pay rent at the end of the month.

Story:
I once worked with a printing business in Port Elizabeth. They had over R400,000 in unpaid client invoices — their biggest asset on the books. But until those clients paid, that cash wasn’t available. Their balance sheet revealed a liquidity issue that wasn’t visible from the income statement alone.

Prompt for the reader:

“If you had to pay your bills today, how much of your ‘assets’ could actually be used?”

2. Liabilities – What Your Business Owes

Liabilities represent obligations—what your business needs to pay to others. These are also divided:

• Current liabilities: Due within 12 months — such as accounts payable (suppliers you owe), credit card balances, VAT owed to SARS, or short-term loans.
  
  
• Non-current liabilities: Longer-term debts — like property finance, equipment loans, or investor repayments scheduled over several years.
  
  

Why this matters:
High liabilities might be manageable during boom times, but in a downturn or unexpected crisis (like COVID-19 or load-shedding disruptions), it could become overwhelming.

Example:
A beauty salon in Pretoria looked healthy until we saw their short-term liabilities. They owed more than they had in current assets, meaning a single bad month could leave them unable to pay staff or rent. The owner took swift action—renegotiated payment terms and cut back on credit spending—once she saw the risk laid bare.

Reader question:

“Do you know what your business owes—and whether you could cover it if revenue stopped for 30 days?”

3. Equity – What Belongs to You

Equity is what remains after your liabilities are subtracted from your assets. It represents your ownership stake in the business.

Equity can include:

• Owner’s capital: Money you’ve invested into the business
  
  
• Retained earnings: Profits that have been kept in the business rather than withdrawn
  
  
• Shareholder equity (for private companies with multiple owners)
  
  

Why this matters:
If your equity is growing, it means your business is becoming more valuable. If it’s shrinking, it could mean you’re relying too much on debt—or the business is eating into reserves to survive.

Analogy:

“Think of equity as your share in a property. If the house is worth R2 million and the mortgage is R500,000, your equity is R1.5 million. The same logic applies to your business.”

Mini-case:
A Durban-based events company increased its equity every year by reinvesting profits and limiting debt. When COVID hit and events were cancelled, they had enough reserves to survive. That resilience came from a strong equity position—and they only knew that because they were tracking it.

The Balance Sheet Equation and Why It Matters

Behind every balance sheet is a simple yet powerful formula:

Assets = Liabilities + Equity

This equation isn’t just for accountants—it’s the foundation of your business’s financial identity. It tells you how your business is funded and how much of it you actually own.

What the Equation Really Means

Let’s break it down:

• Assets are what your business owns (cash, inventory, equipment).
  
  
• Liabilities are what your business owes (loans, supplier payments, taxes).
  
  
• Equity is what’s left for you as the owner once debts are paid.
  
  

When this equation balances, it shows that every rand in assets has a source—either debt (liabilities) or owner investment (equity).

Simple Analogy:

“Think of your business like a house. If the house is worth R1.5 million (assets), and you still owe the bank R500,000 (liabilities), your equity is R1 million—the part you truly own.”

Why It Matters in Real Life

Understanding the balance sheet equation helps you:

• Spot financial imbalances – like high debt and low equity
  
  
• Track how your business is growing – are you gaining value or just adding debt?
  
  
• Make better funding decisions – knowing when to borrow vs. when to reinvest profits
  
  
• Prepare for tough questions – from investors, lenders, or SARS
  
  

Case in Point:
A client of ours, running a small wholesale business in Limpopo, thought things were going well based on rising revenue. But when we reviewed the balance sheet, their liabilities had grown faster than their assets—and equity had actually shrunk. The business was getting riskier without them even realising it. The balance sheet equation made the warning signs clear, and they adjusted their financing strategy just in time.

What Should You Be Looking For?

• Is your equity positive and growing? That’s a sign of financial health.
  
  
• Are your liabilities increasing faster than your assets? That may signal over-reliance on credit.
  
  
• Do you have enough assets to cover your short- and long-term obligations?
  
  

Pro Tip:
Don’t just look at the equation once. Review it regularly (at least quarterly) and compare it to previous years. Trends tell a more powerful story than a single snapshot.

“The balance sheet equation is like the spine of your financial health—if it’s out of alignment, everything else can start to strain.”

What to Look for – Key Ratios and Red Flags

Once you understand the structure of a balance sheet and how it balances, the next step is knowing how to interpret the numbers. This is where financial ratios come in—they turn raw figures into insights.

Think of them as your business’s vital signs: just as a doctor checks your blood pressure and heart rate, these ratios help measure how healthy and stable your business really is.

1. Current Ratio – Can You Pay Your Bills?

Formula:

Current Assets ÷ Current Liabilities

This shows whether your business can cover its short-term obligations using what it already has on hand.

Healthy benchmark: A ratio of 1.5–2 is generally considered safe.

Example:
A cleaning service in Centurion had a current ratio of 0.8—meaning they didn’t have enough liquid assets to pay off short-term debts. When a big client delayed payment, they struggled to meet payroll. After adjusting their payment terms and improving invoicing systems, they brought the ratio up to 1.6 within six months.

2. Debt-to-Equity Ratio – How Much Risk Are You Carrying?

Formula:

Total Liabilities ÷ Total Equity

This shows how much of your business is financed by debt versus your own capital.

Healthy benchmark: Less than 1 is ideal for most SMEs.

Story:
A security company in KwaZulu-Natal had a debt-to-equity ratio of 2.4—meaning they owed more than twice what they owned. Banks were reluctant to approve a loan. We helped them restructure short-term debt and delay expansion until the ratio improved, restoring lender confidence.

3. Accounts Receivable Days – How Quickly Are You Getting Paid?

Formula:

(Accounts Receivable ÷ Annual Revenue) × 365

This shows how long, on average, it takes customers to pay you.

Healthy benchmark: 30–60 days for most small businesses.

Mini-case:
An events company in George had receivable days over 90—clients were taking months to settle invoices. This delayed their ability to pay staff and suppliers. Once they introduced early payment discounts and stricter credit policies, they brought the average down to 45 days.

4. Inventory Turnover – Are You Sitting on Unsold Stock?

Formula:

Cost of Goods Sold ÷ Average Inventory

This tells you how often you sell and replace your stock. A low number might mean overstocking—or poor sales.

Example:
A local electronics retailer discovered they were holding too much obsolete stock. Their turnover was just 2 (they sold through their inventory twice a year), while industry average was 5. They adjusted ordering cycles, bundled slow-moving items, and freed up cash flow.

Red Flags to Watch For

• A current ratio under 1 — signals cash flow stress
  
  
• Declining equity year after year — signals shrinking business value
  
  
• High debt-to-equity ratio — may scare off lenders or investors
  
  
• Long receivable periods — weak collections can choke your cash flow
  
  
• Rising liabilities without asset growth — signals financial imbalance
  
  

“Your balance sheet might not shout for attention like your inbox does—but it quietly shows whether you’re in control or just coasting.”

Why Balance Sheets Are More Than Just Numbers

Too often, balance sheets are seen as just another financial formality—something you send to SARS, hand to your accountant, or stash in a drawer until next year. But if you use it right, a balance sheet becomes a strategic tool. It shows not just where your business is today, but whether it’s strong enough to take the next step—whether that’s growth, investment, or passing it on to the next generation.

1. It Helps You Track Growth (or Trouble) Over Time

When you compare your balance sheet across months or years, patterns begin to emerge:

• Is your equity growing?
  
  
• Are your liabilities creeping up faster than your sales?
  
  
• Are your assets becoming more diversified?
  
  

Real Example:
A garden services business in Rustenburg kept year-on-year balance sheets. By tracking changes, they noticed they were adding more equipment without increasing productivity. They re-evaluated purchasing decisions and improved their debt-to-equity ratio within a year.

2. It Strengthens Your Case with Lenders and Investors

Banks and investors don’t just look at your revenue—they want to know how your business is built. A healthy balance sheet proves you’re managing money responsibly and growing sustainably.

Story:
A Cape Town-based logistics business needed R1.2 million in funding to expand their vehicle fleet. Because their balance sheet showed consistent growth in equity and solid asset management, they got approval with favourable terms—while competitors were rejected.

3. It Informs Smarter Decisions

Should you take a loan now or wait? Can you afford to hire? Is your business ready to scale?

Your balance sheet holds the answers. It provides a high-level view of what you can do and what you should wait on.

“Your profit and loss tells you if you’re making money. But your balance sheet tells you if you’re building something sustainable.”

4. It Complements Your Other Financials

The balance sheet doesn’t stand alone. When used with your income statement and cash flow statement, it gives you a 360° view of your business:

• The income statement shows profitability
  
  
• The cash flow statement shows liquidity
  
  
• The balance sheet shows stability
  
  

Together, they tell your full financial story.

Reflection Prompt for the Reader

• Are you reviewing your balance sheet regularly—or only when your accountant sends it?
  
  
• Have you ever used it to guide a big business decision?
  
  
• What does your equity say about the true value of your business?

Conclusion: From Intimidating to Empowering

If you’ve ever looked at your balance sheet and felt overwhelmed by numbers, you’re not alone. But now you know it’s more than a report—it’s a story. Your story.

It shows:

• How much of your business you truly own
  
  
• How much risk you’re carrying
  
  
• Whether your growth is healthy or hiding problems
  
  
• And how your business might look to banks, investors, or potential buyers
  
  

Understanding your balance sheet means you stop running your business on instinct alone—and start leading it with insight.

“You don’t need to become an accountant—but you do need to become financially fluent.”

So next time your accountant hands you your financials, don’t flip past the balance sheet. Take a moment. Ask the right questions. Spot the trends. Let it guide you.

Because once you understand what those numbers really tell you, you’re not just looking at your business—you’re looking at your potential.