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How to read a balance sheet, and the number it helps you find

In this video, Ciaran O'Donnell builds a simple balance sheet in a spreadsheet and shows how to read a balance sheet line by line, the way an outside investor would. He opens with Warren Buffett, who told Berkshire Hathaway's 2025 annual meeting that he spends more time looking at balance sheets than income statements, because a balance sheet is harder to play games with.

What is on a balance sheet?

Ciaran describes each line in plain English, from the top down:

• Fixed assets: physical things the business owns, such as office and computer equipment and motor vehicles.
• Accounts receivable: customers who owe you money.
• Accrued income: work you have done but not yet invoiced.
• Prepayments: things you have paid for in advance.
• Bank: the money in your account.
• Accounts payable and accruals: supplier invoices you have not paid, and costs you have not yet been invoiced for.
• Deferred income: customers you have billed in advance. (What deferred income is.)
• Taxes you owe: PAYE and National Insurance, VAT and corporation tax.
• Share capital and reserves: equity you have raised, profits or losses carried forward from earlier years, and the profit or loss for this year.

That is the whole thing: a list of assets and liabilities that shows the financial health of the company today, or on the last day of each month if you close your books monthly.

Why investors read it first

Investors read the balance sheet first because it shows how a business trades and manages cash. In Ciaran's example the business has £50,000 in the bank and £135,000 owed by customers. Swap that for nothing in the bank and £185,000 owed, and the net position is identical, but the business is handling its cash very differently. As he puts it: revenue is vanity, profit is sanity, cash is reality. A mild obsession with customers paying on time, to the terms you agreed, is what moves money from their bank account into yours.

It is also hard to window-dress. The lines are real assets, real customer invoices, real supplier statements and reconciled taxes. When the list is complete, Ciaran says it exposes three things:

• Poor cash flow. Do your customers pay you quickly enough?
• Poor bookkeeping. If the balance sheet is not complete, that reflects on you and the business.
• Poor decisions. For example, £10,000 in the bank while paying in advance for stock, materials, rent, insurance or annual subscriptions the business cannot afford.

A worked example: Ciaran's balance sheet

The cost base is the one number you will not find on the balance sheet; you need it from your profit and loss. With it, the business can cover its costs for 2.2 months from net cash, which Ciaran rates medium risk. If net cash grew to £105,000 it would still be medium risk; at £125,000 it reaches 3.3 months, which he calls low risk. If net cash were zero, there would be no cushion at all, and a negative figure, where liabilities exceed cash and current assets, is an increasingly critical position to trade from.

Accountants also use the current ratio, current assets divided by current liabilities, which is 1.6 here. Ciaran's view is that the cushion is the more meaningful number, because it shows how close the business is to a cash-flow cliff edge in months you can plan around.

There is also a two-minute trailer if you want the short version first.

Net reserves are not an invitation to empty the company

Ciaran points to the net reserves, or net worth, at the bottom of the balance sheet and warns that it is not an invitation to take money out of the company. A healthy figure there, or £50,000 in the bank, is not a reason on its own to pay yourself a dividend or spend it. In UK law a company can only pay dividends out of its available profits from the current and previous years (gov.uk explains the rule), and even then profit on paper is not cash in the bank.

Only trust your profit and loss with a clean balance sheet

The profit and loss still matters: it shows revenue, margins and profit, and if you are making a loss, why, and what it would take to turn it round. But Ciaran's golden rule is to trust it only when the balance sheet is clean: check that the balance sheet is correct and complete before relying on the profit and loss.

How to improve what the balance sheet shows

Ciaran's steps are the ordinary ones, done deliberately: grow profits, manage cash more effectively, and do not draw money out of the business too quickly, whether through a director's loan, dividends or salary. The more cushion the business has, the better it absorbs a slow month or a cost you were not expecting.

Checking it without the spreadsheet

You can download your balance sheet and do all of this by hand. Own Your Numbers does the calculation for you: it connects to your Xero read-only, uses your trial balance to calculate net cash and your average monthly cost base over two months, and gives you your cushion in months and a risk rating. One difference to know: our net cash is stricter than a teaching spreadsheet. It leaves out prepayments, because money already spent in advance cannot pay next month's bills, so for a business like this one it would read a little lower.

Balance sheet questions, answered briefly