Accounting

Reading the Balance Sheet: What Owners Should Look For

Most owners stare at the P&L and ignore the balance sheet. That's where the early-warning signals actually live. Here's how to read yours.

By Harry Prabandham3 min · 5 slidesUpdated June 15, 2026

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Balance sheet has three sections: Assets, Liabilities, and Equity. Assets = Liabilities + Equity (always, by construction).
Assets are split into Current (convertible to cash within 12 months) and Non-Current (long-lived).
Liabilities are split the same: Current (due within 12 months) and Long-Term.
Equity is what's left: owners' contributions, plus accumulated profits, minus distributions taken.
Compare to prior month, prior quarter, and prior year. Single-point-in-time balance sheets are noise; trends are signal.

Cash: the cleanest number on the balance sheet. Track 13-week trend, not just point-in-time.
Accounts receivable: rising fast while revenue is flat → collections slipping. Compute DSO (A/R ÷ revenue × days).
Inventory: rising fast → either you're overbuying or sales are slowing. Compute days inventory.
Prepaid expenses: insurance and software annual subs should decline monthly as they amortize. Spikes in prepaid mean you bought something annual.
Working capital = current assets − current liabilities. Positive and rising = good. Negative or declining = funding shortfall coming.

Fixed assets / PP&E: net of accumulated depreciation. Should match the asset register and depreciation schedule on the tax return.
Intangibles and goodwill: from prior acquisitions or capitalized software development. These often need impairment testing.
Investments and notes receivable: lent to owners or affiliated entities. Common with family businesses and often poorly documented.
Capitalized R&D under Section 174: required from 2022 forward. Many SMBs don't realize this hit their balance sheet.

Accounts payable: trending up faster than expenses → you're stretching vendors. Compute DPO (A/P ÷ COGS × days).
Accrued liabilities: payroll accrued but not paid, taxes accrued but not remitted. Often understated by lazy bookkeeping.
Deferred revenue: customer cash you have but haven't earned. Larger than current cash = working-capital risk if customers churn or refund.
Current portion of long-term debt: principal due in the next 12 months. Often the most-missed item in SMB balance sheets.
Long-term debt: total principal outstanding. Check covenant compliance if the loan has any covenants.

Owner capital / paid-in capital: original contributions, not earnings.
Retained earnings: cumulative profits since inception, minus all distributions ever taken. Should grow over time in a healthy business.
Owner draws / distributions: track as a separate equity contra-account, not as an expense.
Tracking error: many SMB balance sheets have an 'Opening Balance Equity' or 'Unclassified' equity account with old plugs from migration. Clean these up; they undermine credibility.
Need a balance sheet review? Rubric Financial includes monthly balance sheet review with every accounting engagement.

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Educational content, not tax, legal, or accounting advice. Confirm with a CPA before acting.

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