How to read and understand a balance sheet simply

What is a balance sheet?

The balance sheet is a financial snapshot of your company at a specific moment. It's a mandatory document that lists on one side what the company owns (assets) and on the other how these assets are financed (liabilities).

Unlike the income statement which measures performance over a period (revenue minus expenses), the balance sheet is a frozen image, generally prepared at the end of the financial year.

For Swiss SMEs and freelancers, the balance sheet is prepared once a year. It allows you to measure the company's financial health and its ability to meet its commitments. It's an indispensable tool for banks, investors and fiduciary agents.

Understanding your balance sheet means understanding the financial structure of your business.

The two columns of the balance sheet: assets and liabilities

The balance sheet is always presented in two columns which must be perfectly balanced. This is the fundamental principle of double-entry bookkeeping: Assets = Liabilities.

On the left, the assets list what the company owns. On the right, the liabilities indicate the origin of the resources that enabled these assets to be acquired.

Let's take a simple analogy: you buy a car for 30,000 CHF with a personal contribution of 10,000 CHF and a loan of 20,000 CHF. In your personal balance sheet, the car appears in assets (30,000 CHF) and the financing in liabilities (10,000 CHF equity + 20,000 CHF debt = 30,000 CHF).

This logic applies to all company operations.

Assets: what your company owns

The left column of the balance sheet presents all the assets and rights held by the company. Assets are divided into two main categories according to the holding period.

Fixed assets group together durable assets that the company keeps for several years. Current assets bring together elements that quickly transform into cash.

This distinction is essential for understanding your company's structure. A service company will have few fixed assets, whilst an industrial company will invest heavily in machinery and equipment.

For a freelancer, assets will mainly consist of customer receivables and cash in the bank account.

Fixed assets

Fixed assets group together assets that the company uses durably in its activity, generally for more than one year.

Tangible fixed assets are physical assets: offices, company vehicles, computers, furniture, production machinery. A freelance graphic designer will have their computer and screen, a craftsperson their professional tools.

Intangible fixed assets concern immaterial assets: purchased software, developed website, patents, registered trademarks, operating licences.

Financial fixed assets include holdings in other companies, long-term loans granted or security deposits.

These assets generally lose value over time (depreciation), except land.

Current assets

Current assets bring together elements that circulate quickly in the company and transform into cash in the short term.

Inventory represents goods, raw materials or finished products intended for sale. A retail business will have significant inventory, unlike a consultant.

Customer receivables are invoices issued but not yet collected. It's the money your customers owe you. Good payment monitoring is crucial to prevent these receivables from accumulating.

Cash includes money available in bank accounts and in the till. It's the most liquid element of your balance sheet, immediately usable to pay your expenses.

Current assets are directly linked to your daily cash flow.

Liabilities: how your company finances its assets

The right column of the balance sheet indicates the origin of the resources that enabled the assets to be financed. Liabilities are not something negative: they simply show how the company obtained the funds.

Liabilities are divided into three main categories: equity (money that truly belongs to the company), long-term debts (loans over several years) and short-term debts (what must be paid within the year).

The structure of liabilities reveals the company's financing strategy. A high proportion of equity indicates financial solidity, whilst high debt can signal a risk or simply a growth phase.

Understanding your liabilities means understanding your dependence on creditors.

Equity

Equity represents the net wealth of the company, what truly belongs to the shareholders or the individual entrepreneur.

It includes share capital (the founders' initial contribution), reserves built up over the years and undistributed profits (accumulated results).

High equity is a sign of financial solidity. It constitutes a safety cushion in case of difficulties and reassures banks when applying for credit.

Example: you create your company with 20,000 CHF contribution. After three years, you've made 15,000 CHF in undistributed profits. Your equity amounts to 35,000 CHF.

It's the key indicator of long-term financial health.

Long-term debts

Long-term debts group together loans and credits repayable over more than one year, generally from banks.

These typically involve loans taken out to finance significant investments: purchase of equipment, professional vehicles, commercial premises or development of a new product.

These debts are less concerning than short-term debts because the deadline is distant. They allow growth to be financed without diluting equity.

Example: a bank loan of 50,000 CHF over 5 years to buy a production machine appears in long-term debts.

Short-term debts

Short-term debts are financial obligations that must be settled within 12 months. They have a direct impact on your cash flow.

They include supplier debts (invoices received not yet paid), VAT collected to be paid to the tax administration, social charges due, salaries to be paid and bank overdrafts.

A high level of short-term debts compared to current assets can signal cash flow tensions. This is why it's crucial to monitor these deadlines and maintain sufficient cash.

For freelancers, managing VAT and social charges often represents the bulk of short-term debts.

How to read a balance sheet: key indicators to monitor

Beyond the raw figures, certain ratios allow you to quickly analyse a company's financial health. These indicators compare different balance sheet items to assess solidity, liquidity and debt.

You don't need to be an accountant to calculate them: a few divisions are enough. These ratios help you take a step back on your financial situation and identify any points of vigilance.

Three essential indicators deserve your attention: working capital (do you have enough stable resources?), the liquidity ratio (can you pay your immediate debts?) and the debt ratio (do you depend too much on creditors?).

These ratios are management tools, not absolute truths. They must be interpreted according to your sector and your development phase.

Working capital

Working capital measures the stable resources available to finance current activity. Simple formula: (Equity + Long-term debts) - Fixed assets.

In other words, it indicates whether your durable resources (equity and long-term loans) cover your durable investments (fixed assets) with a margin for daily operations.

Positive working capital is generally a good sign: you have a financial cushion. Negative working capital signals that you're financing durable assets with short-term resources, which can create cash flow tensions.

Example: equity of 50,000 CHF + LT debts of 30,000 CHF - fixed assets of 60,000 CHF = working capital of 20,000 CHF (positive, therefore healthy).

The liquidity ratio

The liquidity ratio assesses your ability to pay your immediate debts with your quickly mobilisable assets. Formula: Current assets / Short-term debts.

A ratio above 1 means you can theoretically honour all your short-term debts. A ratio below 1 indicates a risk of cash flow tension.

Ideally, this ratio should be between 1.5 and 2. Below 1, warning danger. Above 3, you may have too much dormant cash that could be better invested.

Example: current assets of 40,000 CHF / ST debts of 25,000 CHF = ratio of 1.6 (comfortable situation).

The debt ratio

The debt ratio measures the proportion of debts compared to equity. Formula: (Total debts / Equity) × 100.

This ratio indicates your dependence on creditors. A rate below 100% means your equity exceeds your debts: healthy situation. Between 100% and 200%, debt is moderate. Beyond 200%, the financial structure becomes fragile.

Caution: high debt is not always negative if it finances profitable growth. But it increases risk in case of downturn.

Example: total debts of 60,000 CHF / equity of 40,000 CHF = rate of 150% (moderate debt).

Practical example: deciphering a simplified balance sheet

Let's take the case of Sophie, a freelance graphic designer. Here's her simplified balance sheet at 31 December:

ASSETS: Fixed assets (computer, software) 8,000 CHF | Customer receivables 12,000 CHF | Bank account 15,000 CHF | Total assets: 35,000 CHF

LIABILITIES: Equity 20,000 CHF | Bank loan (long-term) 5,000 CHF | Supplier debts 4,000 CHF | VAT to pay 3,000 CHF | Social charges 3,000 CHF | Total liabilities: 35,000 CHF

Analysis: Working capital = (20,000 + 5,000) - 8,000 = 17,000 CHF (positive, excellent). Liquidity ratio = 27,000 / 10,000 = 2.7 (very comfortable). Debt ratio = 15,000 / 20,000 = 75% (healthy).

Verdict: Sophie has a solid financial structure with good cash reserves and controlled debt.

Balance sheet and invoicing: the link with BePaid

Your daily invoicing management directly impacts your balance sheet. Invoices issued but not collected appear as customer receivables in current assets. The more these receivables accumulate, the more your cash flow deteriorates.

Rigorous payment monitoring and effective reminders allow you to reduce these receivables and improve your liquidity. This is where BePaid comes in: by automating reminders and facilitating the monitoring of unpaid invoices, the platform helps you maintain healthy current assets.

Better payment management means fewer dormant receivables, more available cash and therefore better financial ratios. This positively impacts your working capital and your liquidity ratio.

Note: BePaid is an invoicing tool, not a complete accounting software. To prepare your official balance sheet, you'll still need to call on an accountant or a fiduciary agent.

Understanding your balance sheet is not reserved for accountants. By mastering the basics of assets and liabilities, you have a clear view of your company's financial health. Working capital, the liquidity ratio and the debt ratio are three simple indicators that allow you to anticipate difficulties and make the right decisions at the right time.

A balanced balance sheet starts with rigorous daily management. This includes precise monitoring of your invoices and your collections. Each unpaid invoice directly impacts your current assets and your cash flow. With BePaid, you create QR-invoices compliant with Swiss standards, monitor your payments in real time and automate your reminders to reduce collection delays. Well-managed invoicing means a healthier balance sheet. Try BePaid for free and take control of your cash flow today.