What is a balance sheet?

The balance sheet is a financial statement showing what your business owns (assets), owes (liabilities), and the remaining owner value (equity) at a specific point in time. For professional service firms, the balance sheet answers: How much cash do we have? How much do clients owe us (AR)? What do we owe vendors (AP)? What's our total net worth? The fundamental equation is Assets = Liabilities + Equity. A consulting firm with $500,000 in assets, $200,000 in liabilities has $300,000 in owner equity.

Key characteristics of the balance sheet

• Snapshot in time: Shows financial position as of a specific date (December 31, 2024)

• Three sections: Assets (what you own), Liabilities (what you owe), Equity (owner value)

• Always balances: Assets must equal Liabilities plus Equity

• Assets organized: Current (converted to cash within 1 year) and long-term

• Liabilities organized: Current (due within 1 year) and long-term

Why the balance sheet matters for service firms

The balance sheet reveals financial health beyond profitability. A consulting firm with substantial P&L profits but $0 cash, $400,000 in AR, and $300,000 in debt faces liquidity pressure despite profitability. Banks review balance sheets for credit decisions: debt-to-equity ratios above 2:1 signal overleveraging. Investors examine balance sheets to assess capital efficiency and financial strength. Comparing balance sheets quarter-over-quarter reveals trends: Is equity growing (retained earnings accumulation)? Is AR ballooning (collection problems)? Is debt increasing (funding operational shortfalls)?

Example: Balance sheet for consulting firm (December 31, 2024)

ASSETS

Current assets:

• Cash and cash equivalents: $185,000

• Accounts receivable: $320,000

• Prepaid expenses: $18,000

• Total current assets: $523,000

Fixed assets:

• Equipment (computers, furniture): $85,000

• Less: Accumulated depreciation: -$32,000

• Net fixed assets: $53,000

• Total assets: $576,000

LIABILITIES

Current liabilities:

• Accounts payable: $48,000

• Credit cards: $22,000

• Accrued expenses: $38,000

• Line of credit: $125,000

• Current portion of term loan: $24,000

• Total current liabilities: $257,000

Long-term liabilities:

• Term loan: $76,000

• Total liabilities: $333,000

EQUITY

• Retained earnings: $243,000

• Total liabilities and equity: $576,000

Key metrics:

• Working capital: $266,000 ($523K assets - $257K current liabilities)

• Debt-to-equity ratio: 1.37 ($333K debt / $243K equity)

• Current ratio: 2.03 ($523K current assets / $257K current liabilities)