Balance Sheet Basics: What to Check in 10 Minutes

To read a balance sheet as a founder, start with one equation, assets equal liabilities plus equity, then check 5 lines in about 10 minutes: cash, accounts receivable, accrued liabilities, deferred revenue and debt.¹ Together they show what your P&L cannot, which is whether the profit you booked has turned into cash you can spend.

I look at a lot of balance sheets across the four industries I go real deep in: technology (AI and SaaS), healthcare and biotech, pharma, and pharmacy. A founder reads the P&L every month, and treats the balance sheet as the page the accountant needs for the bank. Then a lender, an investor or a buyer asks about working capital, and the answer turns out to be on the page the founder never read. By the end of this you will be able to open yours, check 5 lines, and explain each one to your board in a sentence.

What is a balance sheet, and what does it tell a founder?

A balance sheet is a snapshot of what a company owns, what it owes and what is left over for the owners on one specific date. The SEC's guide for investors says the two sides must balance: what the company owns has to equal what it owes plus the shareholders' equity.¹ The SBA puts it this way: "The balance sheet is the foundation of managing your finances."²

Think of it as three buckets. Assets are what the company owns or is owed, like cash, receivables and equipment. Liabilities are what it owes, like bills, accrued costs, customer prepayments and loans. Equity is the difference, the part that belongs to the founders and investors. The SEC guide also draws the line that matters most for this article: current assets are the things a company expects to turn into cash within one year, and current liabilities are what it expects to pay off within the year.¹

Why can my P&L look fine while my cash falls?

Because the P&L records revenue when you earn it and cost when you incur it, and neither has to match the day the money moves. The cash flow statement is the bridge. The OpenStax accounting text lays out the logic: to reconcile net income to cash from operations, you add back decreases in current assets, which means a rise in something like receivables works the other way and holds cash back.³

Here is the version I see most, with illustrative numbers (not a client). A founder bills $100,000 in a month and shows an $18,000 profit. The customers have not paid yet, so receivables grew by $70,000, and the bank balance fell by $52,000. Profit of $18,000 less $70,000 of uncollected revenue is a $52,000 drop. The P&L said it was a good month. The balance sheet said the company funded its customers.

This is not a rare problem. The Federal Reserve Banks' 2024 Small Business Credit Survey, with 7,653 responses from employer firms, reported that "More than half of firms cited paying operating expenses (56%) or uneven cash flows (51%) as challenges."⁴ Among venture-backed companies that shut down since 2023, CB Insights found that 70% of 431 cited running out of capital, and it adds that running out of capital is "almost always the final cause of death, not the root problem."⁵ The Fed survey covers all small employer firms and the CB Insights sample is venture-backed only, so I read them as a picture of how common cash strain is. For a baseline, the Bureau of Labor Statistics reports that 46.8% of private-sector establishments opened in the year ended March 2019 were still open in March 2025, though it does not say why the rest closed.⁶

Which 5 lines should I check on my balance sheet every month?

Here are the 5 lines I pull up first, in the order I read them. Each one answers a question about cash, and each one should tie to a document you can put on the table.

1. Cash. Does the balance match the bank statement on the last day of the month?
2. Accounts receivable. What do customers owe you, how old is it, and how much will you not collect?
3. Accrued liabilities and payables. What do you owe that nobody has billed you for yet, and what bills are unpaid?
4. Deferred revenue. How much cash did you collect for work you have not delivered?
5. Debt. What do you owe lenders, and what tests does each loan put on this page?

Cash is the line to tie first, and the standard I borrow is the auditor's. PCAOB's confirmation standard says that for cash held by third parties, and for accounts receivable, "the auditor should perform confirmation procedures in accordance with paragraphs .08 through .23." In plain words, they ask the bank and the customer directly.⁷ You do the small version every month: reconcile the ledger to the statement and keep the reconciliation.

Receivables come next, and the question is age, not just size. Accounting rules expect an allowance for the part you will not collect, because the expected credit loss model covers receivables that come from customer contracts.⁸

Accrued liabilities are the line founders forget, and the one that surprises buyers. They are the costs you have incurred but not been billed for. OpenStax lists accrued expenses among current liabilities next to payables, the current portion of deferred revenue and debt due within a year.⁹ If it does not move as the business grows, costs are being booked when the invoice arrives.

Deferred revenue is cash you already have for service you still owe. Deloitte's revenue roadmap defines it this way: "A contract liability is an entity's obligation to transfer goods or services to a customer" that has paid, or whose payment is due.¹⁰ A growth-finance provider, Gilion, notes that investors read it as a sign of recurring demand,¹² but it is a promise, not profit. I wrote more about it in what deferred revenue means in SaaS.

Debt is the last line, and it is the one with rules attached. Sequoia's runway guide computes runway on net cash, meaning cash minus debt, so a loan changes your months of life even when cash looks fine.¹³ Lenders add tests, and a venture debt lawyer at Orrick lists failing a financial covenant among the defaults.¹¹ A credit agreement filed with the SEC shows what a covenant looks like: a current ratio that cannot fall below 1.0, meaning current assets must cover current liabilities, tested at any time.¹⁴

How do I read a balance sheet in 10 minutes?

Let me walk through one with illustrative numbers (not a client). At September 30 the company shows cash of $240,000, receivables of $310,000, prepaid expenses of $30,000 and other assets of $40,000, so total assets are $620,000. It owes $60,000 in payables, $45,000 in accrued expenses, $150,000 of deferred revenue, $60,000 of debt due this year and $240,000 of longer-term debt, so total liabilities are $555,000. Equity is the $65,000 left over.

Minute 1: does it balance? Assets of $620,000 equal liabilities of $555,000 plus equity of $65,000. Minutes 2 and 3: tie the $240,000 of cash to the bank statement, then set it beside current liabilities of $315,000. Cash alone covers about 76% of them, so this company relies on collecting receivables to pay its bills.

Minutes 4 and 5: receivables are $310,000, half of all assets, so I pull the aging. Say $130,000 is more than 60 days old, which is 42% of the balance. That is the number I would call the customer about. Minutes 6 and 7: for the $45,000 of accrued expenses, I ask to see the schedule behind them and the monthly costs they are estimated against. Minute 8: the $150,000 of deferred revenue is service owed, not cash owed, but the cash is already spent, so delivery has to keep pace.

Minutes 9 and 10: debt. The company owes $300,000 in total against $240,000 of cash, so cash net of debt is negative $60,000. Current assets are $580,000 and current liabilities are $315,000, a current ratio of 1.84, comfortably above a 1.0 floor. Now poke a hole in it. If the $130,000 of old receivables never arrives, current assets drop to $450,000 and the ratio falls to 1.43. That is the back of the napkin test I run on every balance sheet: which one number, if it goes wrong, breaks the picture?

What does working capital say about my cash?

Working capital is current assets minus current liabilities. OpenStax describes it as the resources needed to meet your daily, weekly and monthly operating needs, and in our example it is $580,000 minus $315,000, or $265,000.⁹ The current ratio divides instead of subtracting. Harvard Business School Online says a liquidity ratio above one is usually considered healthy, and OpenStax shows $20,000 of current assets over $10,000 of current liabilities as a ratio of 2 times.¹⁵¹⁶

The catch is that working capital is not cash. Our example has $265,000 of it, and $310,000 of the current assets are receivables other people have to pay. It also shapes what a buyer pays you. BDO describes the working capital peg as "a benchmark or baseline amount of net working capital that is agreed upon by the buyer and the seller."¹⁷ A law firm summary adds the consequence: "If the actual closing payment amount exceeds the estimated amount, the buyer pays the excess to the seller."¹⁸ Your balance sheet moves the price, dollar for dollar.

What do investors, lenders and buyers look at first?

They read the same lines you do, with less patience. A venture investor's diligence request from Cooley asks for the most recent audited financial statements and the latest monthly statements, and for every debt instrument and credit agreement in effect.¹⁹ That list is dated, but the two asks are still the ones I get. Lenders test the ratios, and buyers test working capital against the peg.

What they all want to see is a balance sheet that is the same shape month after month, with a schedule behind each account. In my book, a balance sheet that ties to bank statements, agings and roll forward schedules is audit ready, even if nobody has audited it. The firm I run does no audit or other attest work, and I am not a CPA, but I know what a buyer's accountant asks for first.

Sequoia's runway guide has a warning I repeat to founders: "Just because you have 8 years of runway doesn't mean you can forget about it and assume you're fine."¹³

Has a balance sheet line ever been wrong in public?

Yes, and the cases are worth knowing because each one is a single line. In December 2023 the SEC charged the founder of Tingo and three companies with fraud. Its release says the company's 2022 Form 10-K reported cash of $461.7 million in Nigerian bank accounts, and that "In reality, those same bank accounts allegedly had a combined balance of less than $50 as of the end of fiscal year 2022."²⁰ These are allegations in a complaint, not findings. The lesson for a founder is small and practical: a cash line has to tie to a bank statement.

Wirecard is the famous version. On 22 June 2020 its own management board said "there is a prevailing likelihood that the bank trust account balances in the amount of 1.9 billion EUR do not exist."²¹ Courthouse News reported that this was about a quarter of the company's balance sheet, and the European Parliament's briefing lays out the days that followed, including the regulator appointing a special representative on June 25.²²²³ A smaller case shows the same thing in inventory. The SEC said DGSE "subsequently overstated its inventory by anywhere from 99.1 percent to 227.4 percent in public filings during 2009, 2010, and 2011," after entries made goods that still belonged to consignment customers look like DGSE's own.²⁴

A line can also be missing or risky. The SEC said FTE Networks concealed nearly $23 million of convertible notes from its auditors.²⁵ And the Federal Reserve found that about 94% of Silicon Valley Bank's deposits were uninsured at the end of 2022, with outflows past $40 billion on March 9, 2023.²⁶²⁷ Where your cash sits is a balance sheet question too.

Yours is almost certainly not a fraud. The ordinary version is a balance sheet nobody tied out. A private equity group had laughed the specialty pharmacy I joined out of the room because its books were a mess, and my first job was to go back 3 years and close the books under GAAP so an audit could be done. It took about 9 months. The lesson I took from it is that every balance sheet line has to agree with something outside your own accounting system.

If you run a biotech, pharma, pharmacy or AI company, what changes?

The 5 lines stay the same, and the weight moves. In biotech the accrued liabilities line deserves the most attention, because research and trial costs are estimates. A biotech's 10-Q explains that it estimates preclinical and clinical trial expense from the services performed under contracts with research institutions and research organizations, and then accrues it.²⁸ Ask for the site and vendor activity reports behind the number, and compare them with what you accrued.

In pharma the same judgment shows up at scale. I worked closely with a pharmaceutical client as an outside contractor on its accounting team, providing accrual accounting and supporting the monthly close as the company scaled toward a public IPO. The accruals were the part I would poke a hole in first. In pharmacy, receivables come from payers and pharmacy benefit managers, so the aging and the reimbursement shortfalls decide whether the line is real. I cover that in how pharmacies find PBM underpayments.

In AI and SaaS, annual prepayments turn into deferred revenue, and a model provider bills after the usage, so the month's cost has to be accrued before the invoice arrives. The same habits sit behind the margin discussion in why your AI gross margin is not 80%. The why behind each number is what a board will ask.