The Balance Sheet – Equations for Small Business

Balance Sheet
The Balance Sheet – Equations for Small Business – Video by Micah J Miller

Does my company have a healthy balance sheet?

The balance sheet can be used as an indicator of the health of any company. Picture it as a “scale” that measures the “weight” of a company. If you look closely enough at a company’s balance sheet, you’ll find out how financially strong it really is.

A balance sheet is the financial statement that displays a company’s assets, liabilities, and shareholder equity. Assets can be just about anything owned by the company that can be sold. Liabilities can be loans or other money owed that the company is obligated to pay back. Shareholder equity is total assets minus total liabilities.

With the figures generated from the assets, liabilities and shareholder equity sections on a balance sheet, we can piece together a few key equations that will give helpful insight on the financial health of any given company.

Book Value or Shareholder Equity

It can be powerful for a company to understand its own shareholder equity. This is important to know to better understand what your company is worth if you ever have to jump ship (worst case scenario), or acquire financing. I prefer to call shareholder equity book value, because a lot of small businesses just have one owner. The difference between a company’s assets and liabilities gives you the shareholder equity or book value of the company.

To help you understand a bit better, I’ve put together an example. The company we will use for this example will be referred to as XYZ Inc.

For it’s assets, XYZ Inc has $100,000 in equipment, $250,000 in real property, $50,000 in cash and cash equivalents, $20,000 in accounts receivable, and an $80,000 stake in another company. The total assets of XYZ are worth $500,000.

For it’s liabilities, XYZ Inc has $67,000 in long-term debt (equipment loan), $43,000 in accounts payable, and $10,000 in other current liabilities. The total liabilities of XYZ Inc are worth $120,000.

To get total book value of XYZ Inc, you subtract assets from liabilities ($500,000 – $120,000 = $380,000). XYZ Inc has a positive book value, which is a win. Book value should be positive, though there are companies that get away with a flat or negative book value for a long time.

Though this doesn’t usually apply to private companies, you can use the book value of the company divided by the number of outstanding shares to get the book value share price.

So if XYZ Inc had 1,000,000 shares, you would divide $380,000 by 1,000,000 to get a price per share ($380,000 / 1,000,000 = $0.38).

Price to Book Ratio

Price to book ratio is a popular balance sheet equation used on public companies to determine where the traded price of the company stock is vs the book value share price of the company.

So, if XYZ Inc was publicly traded at $1 per share, and the book value per share was $0.38, you would divide $1 by $0.38 (1 / 0.38 = 2.63). At $1 per share, XYZ is trading 2.63 times over book value.

Quick Ratio

Quick ratio is a balance sheet equation used to determine the short term liquidity of a company. The way a quick ratio is calculated is by adding up all current assets and dividing them by current liabilities.

Current assets would be considered cash and cash equivalents, liquid securities, and accounts receivable.

Current liabilities would be credit card debt, accounts payable, and other current liabilities.

To find the quick ratio for XYZ Inc, we will add up it’s cash and cash equivalents, it’s accounts receivable, and it’s stake in another company (we are assuming these shares are fairly liquid). Then we divide by its accounts payable and other current liabilities. ($150,000 / $53,000 = 2.83).

The quick ratio for XYZ Inc is 2.83. As a general rule of thumb, we always want a company to have a 1.0 quick ratio as a bare minimum, or higher. A 1.0 quick ratio would mean the underlying company could fully pay down all of its current assets at a moments notice, however after doing so there would be nothing left in the bank.

Debt to Equity Ratio

Debt to equity ratio is similar to the quick ratio, but it focuses on total debt and total equity of the underlying company. The question being asked with this ratio is, what kind of financial leverage does this company have? What percentage of this company is operating on debt versus equity in the company. It also tells us out of all book value (shareholder equity) what percentage of it would it take to pay down all debt?

To find debt to equity, we take total liabilities and divide them by the shareholder equity or book value ($120,000 / $380,000 = 0.3126).

So, the debt to equity of XYZ Inc is 0.3126 meaning that it would take 31.26% of the company’s equity to pay down all of it’s debt.

As a rule of thumb, a great debt to equity ratio is anything less that 0.5.


The balance sheet of your company can be difficult to decipher. If you can figure out how to read and analyze it, you will be able to unlock deep insights into the health of your business. Using the equations mentioned above, you can tune your company financially by setting standards to follow. Like I’ve mentioned before, a financial standard for one company may be inappropriate for another. It’s important to set standards that match your appetite for risk as an owner (and other investors).


For additional insight on financial ratios, visit

Understanding Cash Flows

Understanding Cash Flows – Video by Micah J Miller

“My company has been showing profit every month this year. Glad to be in the clear!” – Not so fast…

In my most recent video, I go over the financial health of a publicly traded company called Protolabs Inc.

I know what you are thinking, “why would a billion dollar company have anything to do with my small business?”

This level of thinking is what keeps so many business owners down. The path of growth becomes more clear when you have a blueprint to follow. That’s exactly what public companies can be for you!

It is clear that understanding your company’s financial statements is massively important. In this video, I discuss the importance of the statement of cash flows specifically.

Why Is Cash Flow so Misunderstood?

The statement of cash flow is a financial statement that seems disconnected from the all-powerful profit and loss statement that so many business-people have come to know and love.

The profit and loss tells you what appears to be a straight forward statement – you either made money this month or quarter, or you lost money. Simple enough right?

The truth is, the profit and loss can be a misleading indicator of your company’s health. You can have massive profit one month, and be so cash-poor the next that you are unable to pay your light bill. How does this happen?

Enter the statement of cash flows.

The statement of cashflows tells you what categories your money is flowing out of or into at any given moment.

There are three main categories:

  • Cash Flows from Operations
  • Cash Flows from Investing
  • Cash Flows from Financing

A positive or negative cash flow during any given time period within these different categories can have different connotations. Additionally, one “good” scenario for a company in a certain industry at a certain level of maturity might be a bad for another.

Cash Flows from Operations

Cash flow from operations is money coming in and out from daily operations. This includes sales of the underlying product or services, and expenses including, but not limited to, rent, salaries, utilities, subscriptions, etc. For 99% of companies, this category needs to be positive. If not, you need to reevaluate your business. Granted, some industries can get away with a negative cashflow from operations and get away with it (i.e. pharmaceutical companies).

Cash Flows from Investing

Cash flows from investing include money spent or received from purchasing or selling assets. Assets can be anything from equipment to property. This is category of cash flow is something that would actually be encouraged to be negative. Negative cash flows into investing activities suggests that the company is in “growth mode” and looking to expand operations and grow their balance sheet. A positive cashflow from investing activities suggests that the investments made are now producing dividends OR it could be a negative – pointing towards a sale of assets to make up for a lack of cash flow from operations. This is situational.

Cash Flows from Financing

Cash flows from the financing category specifically point towards debt or equity financing in the company. If a company shows a positive cash flow in this category, they are most likely acquiring long term debt or selling equity shares of their company. Neither of which is necessarily bad, in fact it may be warranted for some companies. However, If a company shows a positive cash flow from financing activities, yet a negative cash flow from operations, this is a tried and true signal that the company may be in big trouble.


Understanding the nature of cash flows can give you insight on your company by being able to identify trends and potential pain points. I highly suggest you either learn how to understand them yourself, or get in touch with a professional who can stay on top of it for you.

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