The structure, in plain language.
Balance sheet has three sections. Assets: what the business owns. Liabilities: what the business owes. Equity: the residual ownership stake (assets minus liabilities). The fundamental equation: Assets = Liabilities + Equity. Always. If your balance sheet does not balance, the books are broken.
Assets are usually split into current (convertible to cash within 12 months: cash, receivables, inventory, prepayments) and non-current (fixed assets, long-term investments). Liabilities split similarly: current (payable within 12 months: AP, short-term loans, accrued expenses, current tax) and non-current (long-term loans, deferred tax). Equity contains owner's capital, retained earnings, current year profit. The structure is universal across IFRS for SMEs.
A worked growing SMB balance sheet.
Distribution business at June 30, 2026. Assets: Cash 1.2M, Bank 4.8M, Accounts Receivable 12.5M, Inventory 18.7M, Prepayments 0.6M (current total 37.8M). Fixed Assets net of depreciation 8.4M, Long-term Investments 0.0 (non-current 8.4M). Total assets $46.2M.
Liabilities: Accounts Payable 9.4M, Short-term Loan 6.0M, Sales Tax Payable 1.1M, withholding tax Payable 0.4M, Accrued Expenses 0.9M, Current portion of long-term loan 1.2M (current total 19.0M). Long-term Loan 4.8M (non-current 4.8M). Total liabilities $23.8M.
Equity: Owner Capital 5.0M, Retained Earnings 13.2M, Current Year Profit 4.2M. Total equity $22.4M. Check: 23.8 + 22.4 = 46.2 = total assets. Balanced.
Diagnostic one: working capital and current ratio.
Current ratio = Current Assets / Current Liabilities. In our example: 37.8 / 19.0 = 1.99. A ratio above 1.5 is healthy for distribution; above 2.0 is comfortable; above 3.0 may indicate over-investment in working capital. Below 1.0 means current liabilities exceed current assets, a liquidity warning. Quick ratio (excludes inventory) = (37.8 - 18.7) / 19.0 = 1.01. Right at the edge; if inventory is hard to liquidate, cash flow is tight.
Working capital in absolute terms = Current Assets - Current Liabilities = 37.8 - 19.0 = $18.8M. Compare to revenue. If annual revenue is $90M, working capital is 76 days of revenue, which is high. If revenue is $200M, working capital is 34 days, which is healthy. Context matters.
Diagnostic two: receivables and inventory days.
Days Sales Outstanding (DSO) = AR / (Revenue / 365). With AR 12.5M and revenue 90M: DSO = 50.7 days. If your contractual terms are net 30, you have 21 days of slippage on average. AR aging will tell you which customers cause it.
Days Inventory Outstanding (DIO) = Inventory / (COGS / 365). With inventory 18.7M and COGS 65M: DIO = 105 days. Three and a half months of inventory on hand. For a distributor of fast-moving goods, this is too much; $4-5M could probably be unlocked. For slow-moving categories, 105 days might be normal. Per-product DIO surfaces the laggards.
Days Payable Outstanding (DPO) = AP / (Purchases / 365). With AP 9.4M and purchases 60M: DPO = 57 days. Cash conversion cycle = DSO + DIO - DPO = 50.7 + 105 - 57 = 98.7 days. Roughly 99 days of cash trapped in the business cycle. Reduce DSO and DIO, the cycle shrinks, working capital eases.
Diagnostic three: leverage and solvency.
Debt-to-Equity = Total Liabilities / Equity = 23.8 / 22.4 = 1.06. Below 1.0 conservative, 1.0-2.0 moderate, above 2.0 aggressive. A 1.06 in a distribution SMB is moderate and manageable. Debt-to-Assets = 23.8 / 46.2 = 51.5%. Half the business is financed by debt, half by equity. Reasonable for working-capital-heavy businesses.
Interest Coverage = EBIT / Interest Expense. If operating profit is $6M and interest is $1.5M: 4.0x coverage. Above 3.0x is comfortable; below 1.5x is dangerous; below 1.0x means earnings cannot cover interest, a structural problem. Banks watch this number closely when extending credit.
Diagnostic four: composition checks.
Cash and bank as a percentage of total assets: 6.0M / 46.2M = 13%. Reasonable. Below 5% is liquidity risk; above 25% may indicate idle capital not being deployed. Inventory as a percentage of current assets: 18.7M / 37.8M = 49%. High; a lot of working capital is sitting in stock. AR as a percentage: 12.5 / 37.8 = 33%. Combined, AR and inventory are 82% of current assets, meaning only 18% is actual cash and bank. Liquidity is dependent on collecting and selling.
Equity composition: 13.2M retained earnings against 5M owner capital. Retained earnings are 2.6x capital, indicating the business has been profitable and reinvesting. A young business would have retained earnings near zero or negative. A mature business with low retained earnings has been distributing profit; whether that is sustainable depends on the cash flow.
The five-minute review questions.
Five questions every owner should answer in five minutes per month. One: did total assets grow, shrink, or stay flat versus last month? Two: where did the change come from (cash, receivables, inventory, fixed assets)? Three: did liabilities grow faster than assets (becoming more leveraged) or slower (deleveraging)? Four: did equity grow by the amount of monthly profit minus drawings? If not, where did equity move? Five: any account that doubled or halved unexpectedly?
Five questions, five minutes, five major issues caught before they grow. Owners who do this monthly catch problems six months earlier than owners who only review at year end. Nonari shows month-over-month movement on every line so the comparison is one click; manual systems require building a comparative balance sheet which takes 30 minutes if you do it carefully.
- Total assets up, down, flat?
- Where did the change come from?
- Leverage moving up or down?
- Equity ties to profit minus drawings?
- Any single account moved unexpectedly?
When the balance sheet lies.
A balanced balance sheet does not mean a correct one. Five common lies. One: AR includes uncollectible customers not yet written off; the asset is a fiction. Two: Inventory includes obsolete stock at original cost; the asset is overstated. Three: Fixed assets include items that were disposed but not derecognized. Four: Bank balance includes uncleared cheques; cash position is overstated. Five: Liabilities exclude known unbilled obligations; the picture looks better than reality.
Year-end audit catches these. Monthly close discipline catches them earlier. The balance sheet is only as honest as the underlying reconciliations. Without bank reconciliation, AR aging review, inventory cycle counts, fixed asset register, and accruals, the balance sheet is a number that ties to itself but not to reality. Use the balance sheet to confirm reality, not to define it.