Balance Sheet

A balance sheet is a snapshot of a business's financial position at a specific date. It shows three things: what the business owns (assets), what it owes (liabilities), and the difference between the two (equity or net worth). The fundamental accounting equation is Assets = Liabilities + Equity.

Lenders use the balance sheet extensively in credit assessment. Key metrics include net asset value (NAV), current ratio (current assets divided by current liabilities), gearing (debt as a proportion of equity), and the strength of fixed versus intangible assets. A strong balance sheet with real, tangible assets and modest debt typically leads to better lending terms.

For asset-based lending, invoice finance, and secured loans, the balance sheet determines how much funding a business can access - the facility limit is calculated as a percentage of eligible assets on the balance sheet. Keeping balance sheet data current and well-presented is important for any business seeking external finance.

Example

A manufacturing business with £500,000 of fixed assets, £200,000 of debtors, and £150,000 of liabilities has a net asset value of £550,000. A lender might provide up to 70% of fixed assets and 80% of debtors - £530,000 in total.

Related terms