Your Complete Guide to Reading Balance Sheets

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How to Read a Balance Sheet

Most people obsess over the income statement—revenue growth, profit margins, burn rate. But the balance sheet? That's where the real story lives. It's not just a snapshot of what you own and owe. It's the foundation that determines whether your company crashes in a downturn or captures opportunity when competitors fold.

This isn't for CFOs who already live in spreadsheets. This is for operators, founders, and leaders who need to understand the financial infrastructure their company runs on—because your CFO's job gets a hell of a lot easier when everyone speaks the language.

Three Sections That Tell Everything

The balance sheet operates on a simple equation that must always hold true:

Assets = Liabilities + Equity

Think of it as the financial infrastructure layer of your business:

• Assets: What you own. The resources that generate future value.

• Liabilities: What you owe. The obligations you're contractually bound to settle.

• Equity: What's left for shareholders after netting everything out.

Here's what most people miss: the income statement isn't separate from the balance sheet—it flows directly into it. Every dollar of profit or loss rolls into retained earnings each period. When you spend $10,000 on Google Ads, cash drops by $10,000 and equity drops by $10,000 through the P&L. The balance sheet always balances. This is how the system works.

Assets: Your Resource Base

Assets appear in order of liquidity—how fast you can convert them to cash or deploy them to generate cash. This sequencing matters because it tells you how flexible and resilient your financial position actually is.

Current Assets

Cash and cash equivalents — Money in the bank plus ultra-liquid investments under 90 days (T-bills, money market funds). This is your oxygen supply.

Short-term investments — Marketable securities with maturities beyond 90 days but typically under a year. Companies treat this as part of their cash position because it converts to cash imminently.

Accounts receivable — Money customers owe you. For SaaS companies with annual upfront contracts, the entire invoice hits AR immediately. For usage-based billing, it enters AR at period-end based on actual consumption. This is revenue you've earned but haven't collected yet.

Deferred commissions — Sales commissions that accounting rules require you to capitalize on the balance sheet instead of expensing immediately. They're then amortized over 3-5 years. If you're evaluating unit economics using accounting commission expense, you might be deceiving yourself—check the actual cash impact on GTM efficiency.

Prepaid expenses — Rent, insurance, software licenses, marketing programs you've paid for upfront but haven't consumed yet. Value waiting to be recognized.

Non-Current Assets

Long-term investments — Securities with maturities beyond one year. Guaranteed to convert to cash, just not immediately.

Property and equipment — For most cloud companies, this is minimal. If you see significant numbers here, you're either capital-intensive (data centers, manufacturing) or in expansion mode (construction in progress).

Operating lease right-of-use assets — Your contractual right to use leased property over the lease term. Primarily office space, but could include equipment or facilities.

Goodwill — The premium paid above fair value when acquiring another company. It lives on the balance sheet indefinitely unless there's impairment. Public and private companies don't expense this—it just sits there as a reminder of what you paid.

Intangible assets — Non-physical assets with real value: patents, trademarks, customer relationships, proprietary technology acquired through M&A. Under accounting rules, you generally can't create intangible assets organically—they appear through acquisitions. Some amortize over time (finite-lived), others don't (indefinite-lived).

Deferred commissions, non-current — The portion of capitalized commissions that will be expensed beyond one year.

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Liabilities

Liabilities appear in order of urgency—what's due soonest shows up first. This structure reveals your liquidity pressure and long-term obligations in one glance.

Current Liabilities

Accounts payable — Vendor bills waiting to be paid. If this number looks unusually high relative to your expense base, someone might be managing cash burn by delaying payments. Watch for that.

Accrued expenses — Obligations for services received or work performed that haven't been invoiced yet and aren't in AP. Examples: payroll between pay periods, interest accrued but not yet paid, taxes owed.

Operating lease liabilities — The flip side of lease right-of-use assets. This is what you actually owe on those leases in the next 12 months.

Deferred revenue — For cloud companies, this is the golden liability. When you invoice a customer, both AR and deferred revenue increase by the invoice amount. AR drops when cash arrives. Deferred revenue drops when you deliver the service and recognize revenue. If deferred revenue is growing faster than revenue recognition, new sales are accelerating—exactly what you want to see.

Non-Current Liabilities

Operating lease liabilities, non-current — The long-term portion of lease obligations.

Deferred revenue, non-current — Revenue you've billed for but won't recognize for over a year. Only relevant for multi-year contracts paid upfront.

Debt — While most venture-backed companies fund through preferred equity, debt financing is common for acquisitions, working capital, or extending runway. The terms and maturity matter—this is cash you must repay.

Other liabilities — Miscellaneous obligations that don't fit elsewhere. If anything in here grows large enough, it gets broken out separately.

Stockholders' Equity

Equity is what's left after subtracting liabilities from assets. Some people call it net worth, but that's misleading—because most of a company's real value (brand, customer relationships, proprietary technology, team expertise) doesn't appear on the balance sheet at all. Accounting rules prevent recognizing these internally generated assets.

Common stock & Additional paid-in capital — All the money shareholders have invested in the company through equity financings.

Retained earnings (or accumulated deficit) — The cumulative profit or loss from all income statements since inception. Net income adds to it. Dividends subtract from it. Many cloud companies stay unprofitable for years, so this section shows as "accumulated deficit" until profitability digs them out of the hole.

Why This Actually Matters

Liquidity and runway — Can you cover short-term obligations with current assets? How many months of cash do you have at current burn? A strong balance sheet lets you weather downturns without panic and capture opportunities when competitors are forced to retreat.

True financial health — A lot gets hidden in balance sheet management. Companies can hold excessive AP to make cash burn look better. They can amortize expenses aggressively (like spreading commissions over 10 years instead of 3) to inflate assets and understate costs. If you know what to look for, you see through the optimization.

Strategic optionality — Businesses with clean balance sheets and deep liquidity can move fast when markets shift. They acquire distressed competitors, invest in R&D during downturns, and negotiate from positions of strength with vendors and customers.

Closing thoughts

The balance sheet is foundational.

Companies that understand and actively manage their balance sheet hold a structural advantage over those that don't. This isn't accounting theater—it's the infrastructure that determines whether you're building for resilience and scale or just hoping nothing breaks.

Gary Bailey is the founder of Strategim, a monetisation & pricing expert with a deep background in financial services, accounting, pricing, and AI.

In this conversation, Gary and I discuss:

• Why has monetisation been ignored as a core discipline in business schools for so long

• When helping small businesses recruit for the role of “monetisation architect,” what does that job description actually look like

• What’s the most counterintuitive pricing insight that goes against conventional wisdom in finance or SaaS?

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