What is a Balance Sheet?

The balance sheet presents a summary of a company's assets, liabilities and equity at a specific date. It is one of the fundamental documents in the financial statements.

To help you see things more clearly, Mallette's business accountants explain in detail what a balance sheet is, how it reads and why it's mandatory for assessing your organisation's financial health.

What is a balance sheet?

A balance sheet is a financial document that shows a company's assets and liabilities at a specific point in time, usually at the end of the financial year. It is structured in two parts, assets (what the company owns) and liabilities (what the company owes), and provides a better understanding of the company's financial health, solvency and ability to cover its debts.

What is the purpose of a balance sheet?

The balance sheet is a strategic tool for company directors. Here are the main objectives it helps to achieve.

Assessing the company's financial situation

The balance sheet shows what the company owns (assets) and what it owes (liabilities). It helps to measure its net worth, understand the composition of its resources and assess its financial stability.

Understanding solvency and ability to repay debts

By examining debt and equity, the balance sheet shows whether the company can honour its financial commitments. It is a key indicator of the company's solidity and its ability to absorb risk.

Preparing a financing application or bank negotiation

Banks and investors rely on the balance sheet to measure debt capacity, analyse collateral and assess financial management. A clear balance sheet makes it easier to obtain financing and better terms.

Diagnose financial health and cash flow requirements

The balance sheet can be used to identify signs of stress (lack of cash, high receivables, large inventories) and to calculate indicators such as working capital or WCR. It helps to anticipate cash requirements and avoid difficulties.

Meeting tax and regulatory obligations

As an official document, the balance sheet must be sent to the tax authorities and serves as the basis for a number of accounting and tax calculations. It is also essential in the event of an audit or verification.

What does a balance sheet consist of?

Assets: what the company owns

Assets comprise all the property and rights held by a company. They are divided into two categories.

Fixed assets

These are assets intended to be used by the company on a long-term basis, generally for more than one year. They are not intended for short-term sale. They include :

• Tangible fixed assets: land, buildings, machinery, vehicles;

• Intangible fixed assets: software, patents, goodwill;

• Financial fixed assets: equity interests, guarantee deposits, long-term loans.

Current assets

These are goods and resources that are rapidly renewed during the operating cycle. They include :

• Inventories: goods, raw materials, finished goods;

• Trade receivables: amounts to be collected;

• Cash and cash equivalents: cash in hand, bank accounts, short-term investments.

These factors make it possible to assess the company's liquidity and its ability to finance its day-to-day operations.

Liabilities: what the company owes

Liabilities include all financial debts and obligations. It is used to assess short- and long-term commitments.

Short-term debt

These are debts due within the next 12 months:

• Accounts payable;

• Short-term borrowings;

• Tax and social security liabilities;

• Bank overdrafts.

They indicate the immediate financial pressure the company is under.

Long-term debt

These are financial commitments maturing in more than one year:

• Bank loans;

• Government loans;

• Miscellaneous financial obligations.

They represent the long-term financing structure.

3. Shareholders' equity

Equity represents the company's stable resources, including :

• Shareholders' or partners' contributions;

• Retained profits;

• Reserves.

Equity is a key indicator of a company's financial strength.

How do I read a balance sheet?

Reading a balance sheet is a strategic exercise that helps you understand the financial stability of your business, identify risks and make better business decisions.

The main elements to be analysed

1. Cash flow

Cash is money that is immediately available: cash in hand, bank accounts, liquid investments. Sufficient cash flow guarantees the company's ability to pay its current obligations and deal with unforeseen events. A cash position that is too low or in constant decline is a warning sign.

2. Stocks

Inventory levels that are too high can tie up cash unnecessarily, while those that are too low can adversely affect sales. Inventory analysis is therefore a way of assessing the effectiveness of operational and supply management.

3. Trade receivables

Receivables represent the money that customers owe the company. A large amount or a rapid increase in receivables may indicate that payment terms are too long or that there is a risk of bad debts. Good collection management is essential to preserve cash flow.

4. Indebtedness

Debt can be used to finance growth, but if it is too high, it can weaken the company. The balance sheet helps to distinguish between short-term debts (which are more urgent) and long-term debts (which are easier to plan). The aim is to check whether the company can meet its commitments.

5. Shareholders' equity

Equity represents the company's stable resources: capital contributions, reserves, retained earnings. A high level of equity is an indicator of solidity, while a low level may reveal a financing shortfall or a history of losses.

Questions to ask yourself when interpreting the balance sheet

Does the company have sufficient liquidity?

Cash and current assets must be sufficient to cover immediate expenditure. A company lacking cash is likely to run into difficulties in the short term.

Are debts sustainable?

It is important to assess the weight of debt in relation to income, cash flow and equity. Too much debt can limit the ability to invest or increase vulnerability in times of uncertainty.

Is working capital positive?

Positive working capital means that the company has sufficient resources to finance its day-to-day operations. Negative working capital may indicate a risk of cash flow tension.

Are investments profitable?

We need to analyse fixed assets: machinery, equipment, software, buildings. These assets must generate value in excess of their cost. Otherwise, they can become a drag on performance.

Common mistakes when reading a balance sheet

Focusing solely on sales: the balance sheet reveals real solidity, even when sales are high.

• Confound profit and cash flow: an accounting profit does not guarantee good liquidity.

• Négliger les dettes à court terme : elles peuvent étouffer l'entreprise si elles dépassent les capacités de paiement.

• Forgetting to analyse trends: a single balance sheet is not enough; you need to compare several years.

• Ignore the quality of receivables and inventories: these items can mask significant risks.

• Reading the balance sheet without considering the income statement and cash flows: the three documents are complementary.

Example of a balance sheet

Understanding the financial ratios derived from the balance sheet

Here are the main financial ratios to keep an eye on, with simple explanations tailored to the realities of Quebec SMEs.

Current ratio

The current ratio measures a company's ability to repay its short-term debts using its current assets.

Formula:

Current assets ÷ Current liabilities

Interpretation:

• > 1: the company can cover its short-term obligations = good liquidity.

• ≈ 1 : area of vigilance, especially if inventories account for a large proportion of current assets.

• < 1: the company could run out of cash to pay its current debts = financial strain to watch out for.

For an SME, aiming for a ratio of between 1.2 and 2 is generally healthy, depending on the sector.

Debt-to-equity ratio

The gearing ratio indicates how much of a company's assets are financed by debt rather than equity.

Formula:

Total liabilities ÷ Total assets

Interpretation:

• Low ratio (< 0.5): solid financial structure, little reliance on debt.

• Moderate ratio (0.5 to 0.7): acceptable in many sectors, especially if the company generates stable cash flows.

• High ratio (> 0.7) : increased risk, heavy reliance on borrowing, vigilance recommended.

Financial institutions look closely at this ratio when applying for finance.

Financial autonomy ratio

This ratio measures the proportion of a company's financing provided by its own resources. It is one of the most important indicators of long-term stability.

Formula:

Equity ÷ Total assets

Interpretation:

• > 40% : good financial autonomy, solidity and ability to absorb risk.

• Between 20% and 40%: acceptable depending on the industry, but something to watch out for.

• < 20%: high dependence on debt, increased risk in the event of a downturn.

A good level of equity reassures financial partners and strengthens the company's credibility.

Working capital and working capital requirement (WCR)

Working capital

Measures the company's ability to finance its day-to-day operations.

Formula:

Current assets - Current liabilities

Interpretation:

• FR positive: the company has the resources it needs to operate properly.

• FR negative: risk of lack of liquidity, dependence on external financing or supplier deadlines.

Working capital requirement (WCR)

Indicates the financial resources required to cover the operating cycle.

Formula:

Inventories + Trade receivables - Trade payables

Interpretation:

• Low or falling WCR: effective management of inventories and customer payments.

• High WCR: the company ties up too much cash in inventories or receivables → risk of cash flow tensions.

For an SME, controlled working capital ensures stable growth without financial pressure.

How can you improve your balance sheet?

For executives and managers, certain simple, structured actions can help improve the financial health of the company.

Here are the most effective levers according to the experts at Mallette.

Strengthening cash flow

Cash flow is a company's financial lifeblood. There are several ways to improve it:

• Better cash flow planning;

• Limiting non-essential expenditure;

• Optimising customer and supplier payment cycles;

• Implementing financial forecasting tools.

A strong cash position improves resilience and facilitates access to finance, a key priority for the development of companies.

Reducing short-term debt

Short-term debts put immediate pressure on cash flow. To put this section of the balance sheet on a sounder footing, you can :

• Renegotiate bank terms;

• Spread some borrowings over a longer term;

• Transform some short-term debt into long-term debt;

• Consolidate borrowings to simplify the financial structure.

These adjustments improve financial visibility and the ability to absorb fluctuations in income.

Optimising stock management

Too much stock ties up cash, while too little stock risks slowing sales. The aim is to achieve balance:

• Better anticipate demand;

• Reduce dormant stocks;

• Implement turnover indicators;

• Automate monitoring using digital tools (Power BI, automated dashboards).

Good inventory management is directly reflected in current assets and contributes to healthier working capital.

Improving debt collection

Large trade receivables can worsen cash flow and mask a fragile financial performance. To speed up collections:

• Review payment terms;

• Automate reminders;

• Monitor customer accounts with real-time dashboards;

• Establish a clear dunning or bad debt management process.

Proactive collection management improves liquidity and reduces the risk of loss.

Structuring investments

Investments must be aligned with business strategy and financial capacity. To strengthen the balance sheet :

• Evaluate the expected profitability of each project;

• Plan sustainable financing;

• Prioritise the most structuring investments;

• Take advantage of digital solutions to analyse ROI.

Investing at the right time and with the right financing structure can support growth while maintaining financial strength.

Turn your figures into strategic levers

A well-prepared and properly interpreted accounting statement ensures that you stay in good standing and make the best decisions for your business. Whether you need to produce your financial statements, analyse your results or obtain strategic guidance, the experts at Mallette are here to guide you.

Our accountants and advisors will help you draw up your balance sheet, interpret your figures and turn your financial data into concrete business decisions. Contact us for personalised support.