To run a limited company business successfully, it’s essential that you know how to read the company’s balance sheet. But this isn’t just useful for business owners; understanding a balance sheet is useful for potential investors, suppliers, and even future employees!

These financial documents can give important clues about lot about a company’s financial health, performance and overall strategy. The trick is making sense of the data.

In this blog, I’ll take you through some key things to look out for when reviewing a balance sheet, even using unaudited accounts.

We’ll use GymShark as an example, a company that started small but scaled rapidly. We are using the 2015 accounts because from 2016 the accounts were audited and therefore completely different disclosures.

What is a balance sheet?

A limited company’s balance sheet is a financial snapshot at a specific point in time, including:

• Assets (what the company owns)

• Liabilities (what the company owes)

• Equity (what is left for shareholders)

Small and medium-sized enterprises (SMEs) may file simplified accounts that exclude a profit and loss (P&L) statement, so being able to interpret a balance sheet is especially important.

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1. Cash at Bank: Is the Company Sitting on Cash?

“Cash is king” is a common phrase in business finance, and for good reason. A healthy cash balance may be a sign of a strong financial position, but this isn’t always the case.

A lot of scaling businesses (or scale-ups) will be reinvesting profits immediately into growth projects, rather than sitting on it. If it is beneficial to present a strong financial position, a higher cash balance could be useful.

If a business wants to boost its cash balance before filing the balance sheet, it can:

• Collect outstanding invoice payments early

• Defer non-urgent payments until later  

• Delay director dividend payments

2. Profit and loss (P&L) reserves: Performance insights

The filleted accounts don’t include formal profit and loss (P&L) accounts, but understanding the balance sheet can still provide insights into performance through the movement in reserves.

Example

If a balance sheet shows that reserves increased from £1.2m to £1.9m, this could indicate that:

• The company made over £1m profit

• The company paid Corporation Tax

• The company distributed some dividends to shareholders

• The company then retained £0.7m in equity

Obviously, this is just an example, and the real figure may fluctuate based on the company’s overall strategy. For instance, a successful SME may have very small retained profits due to higher dividend extraction or greater re-investment. The ability to estimate the tax position is trickier for innovative companies, who are incentivised to invest in R&D.

3. Debtors: How much is owed to the company?

Debtors indicate how much money is owed to the company at the time of the balance sheet being filed. For a retail company like Gymshark, you wouldn’t expect a lot of trade debtors because transactions are paid at the point of sale. So, an unusual increase here could indicate non-trade debtors (such as VAT refunds or prepayments).

But in a typical company trade debtors can be used to estimate turnover of a company.

For example trade debtors are £500k and the industry average payment days are 30 days you can estimate the turnover to be £6m. In the notes to the accounts you can often find the breakdown of the debtors to confirm the specific Trade Debtors figure (on the face of the accounts it is the total of all debtors that are due for payment in 12 months).

4. Net Current Assets: Insights into liquidity

A company’s net current assets are its current assets less its current liabilities. This figure shows what would be left over if you collected all short-term receivables and paid off all short-term debts.

A positive balance here is usually a good sign. It shows that a business is liquid enough to meet its financial obligations. A negative figure here might be a sign of trouble.

5. Net Current Assets: Insights into liquidity

Fixed assets on the balance sheet cover things that the business is holding on to for more than a year, such as a premises, equipment or vehicles. A sizeable increase in fixed assets could indicate the company is investing in new equipment and machinery, upgrading their offices or expanding their fleet of vehicles. This could be a sign that a company is committed to long term growth and improving its infrastructure.

6. Filing Date: Why timing matters

According to the law, UK limited companies have 9 months after their year-end to file their accounts. It isn’t necessarily a sign of trouble if they are filed close to the deadline, but it is still worth noting.

Early filing is encouraged as a good practice, as it helps avoid the risk of last-minute penalties. It also demonstrates transparency to stakeholders and means the company has time to play for tax payments better.

It’s worth noting that delays in filing could also be strategic; for example, companies experiencing a difficult year may delay filing to manage their perception.

Key takeaways: Why it’s important to understand balance sheets

Balance sheets are a useful source of information for lots of different parties involved in a business. If you are looking to buy from a business, invest or partner with it, or are considering working for them, understanding its balance sheet is highly advantageous.  

Understanding a balance sheet means you get important hints about:

• Company liquidity

• Profitability

• Turnover

• Investment and long-term planning

• Overall financial strategy and behaviour

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If you know how to read them closely, even basic statutory reports like a balance sheet can tell an important story, inform decision making and provide key insights into a company.

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