“Profit is an opinion. Cash is a fact.”
Most business owners know whether they’re busy. Many know whether they’re making a profit. But surprisingly few know whether their business is actually financially healthy.
That’s where the balance sheet comes in.
Let’s be honest—most people open a Balance Sheet, see a page full of numbers and immediately close it again. Unlike a Profit & Loss Statement, which tells you how your business performed over a period of time, the Balance Sheet is more like a financial snapshot. It shows what your business owns, what it owes, and what’s left over for you as the owner.
And while it might not be the most exciting report in your accounting software, it can reveal issues that your bank balance and P&L simply can’t.
Whether you’re running a short-term rental business, a trade business, a café, or an online store, understanding your Balance Sheet can help you make smarter decisions and avoid nasty surprises.
The financial health check for your business.
A Balance Sheet shows the financial position of your business at a specific point in time. Think of it like taking a photograph of your business finances today. It shows:
what your business owns
what your business owes
what belongs to you as the owner
The relationship between these sections can be summarised by a simple formula:
Assets – Liabilities = Equity
Don’t let the accounting language scare you. It’s really just another way of saying:
What’s left over for the owner is whatever remains after taking into account what the business owns, less what it owes.
For example, if your business owns assets worth $500,000 and owes $300,000 in loans, bills and other liabilities, the remaining $200,000 represents the owner’s equity in the business.
The higher the equity, the more value has been built within the business over time.
Three key sections that tell the story of your business
Unlike a P&L, which measures performance over time, the Balance Sheet focuses on position. Specifically, you’ll find three major sections.
Assets
Assets are things the business owns or controls that have value.
Examples might include:
✅ Money in the bank
✅ Unpaid invoices
✅ Security Deposits
✅ Equipment
✅ Vehicles
✅ Computers
✅ Furniture
✅ Property
✅ Inventory
For STR businesses, this may also include things like linen and appliances, cleaning equipment, bonds or deposits held in relation to properties.
The key question is, What resources does the business have available to generate future income?
Liabilities
Liabilities are amounts the business owes to others.
Some examples might include:
⬇️ Loans
⬇️ Credit Cards
⬇️ Unpaid Supplier Bills
⬇️ GST owed to the ATO
⬇️ Accrued (but unpaid) PAYG Withholding
⬇️ Superannuation Contributions pending payment
⬇️ Financing Arrangements
For many growing businesses, liabilities aren’t necessarily bad. In fact, responsible use of debt is often a normal part of growth.
The important question is….Can the business comfortably meet its obligations when they fall due?
Equity
Equity is the value left over after liabilities are deducted from assets. As we already learned, Assets – Liabilities = Equity This represents the owner’s stake in the business & gives some indication of what the business is worth.
Equity can include:
👤 Capital Contributed by Owners
👤 Retained Profits from Prior Years
👤 Current Year Earnings
👤 Owners Drawings or Distributions
Think of equity as the net worth of the business.
So…what should you actually be looking for?
A Balance Sheet isn’t something you review once a year at tax time. It’s a tool that helps identify risks, opportunities, and trends before they become major problems. Just like with your P&L, trends over time matter more than a single number. To get the most value, you should compare:
this month to last month
this quarter to last quarter
this year to last year
This helps identify whether your financial position is improving or deteriorating and allows you to make corrections before things escalate too far. Let’s break it down into key sections.
Cash & Bank Balances
Let’s start with the obvious one.
Most business owners jump straight to the bank account balance. That’s completely normal—but it’s only one piece of the puzzle.
If your cash balances are consistently growing, that’s generally a positive sign. Ideally, having a buffer of cash that covers about three months of your business costs helps smooth out the ups and downs of your cashflow cycle.
If cash is regularly tight despite strong sales, it may indicate issues elsewhere in the Balance Sheet.
Things to consider:
➡️ Are customers taking too long to pay?
➡️ Is debt increasing?
➡️ Are large tax liabilities building up?
A healthy bank balance gives your business flexibility and breathing room.
Accounts Receivable (Who owes you money?)
Accounts Receivable represents unpaid customer invoices….work you’ve completed but haven’t been paid for yet.
If this balance keeps growing, it may indicate:
➡️ Customers are taking longer to pay
➡️ Collections processes need improvement
➡️ Cashflow pressure is developing
It’s important to understand that the sales shown on your Profit & Loss Statement don’t automatically translate into money in the bank. Revenue may have been earned and recognised, but until the invoice is paid, it remains an amount owed to your business.
This means your reports can show strong turnover and profitability while cashflow remains tight because customers haven’t actually paid yet.
A healthy receivables balance is one that converts into cash quickly.
Accounts Payable (Who do you owe?)
Accounts Payable represents supplier bills that haven’t yet been paid…..goods or services you’ve received, but haven’t paid for.
Some outstanding bills are completely normal. In fact, most businesses will have supplier invoices sitting in Accounts Payable at any given time. However, if this balance continues to grow month after month, it can indicate:
➡️ Suppliers are waiting longer to be paid
➡️ More of your future cash is already committed to existing bills
➡️ Delayed payments can strain supplier relationships and potentially impact your reputation
Just as Accounts Receivable represents money owed to your business, Accounts Payable represents money your business owes to others.
A growing payable balance isn’t always a bad thing. Many businesses deliberately use supplier trading terms to manage cashflow. The key is understanding whether the balance reflects a planned strategy or whether bills are simply building up faster than they can be paid.
Remember, suppliers are often important business partners. Consistently paying late can put pressure on those relationships and, over time, may affect your ability to negotiate pricing, payment terms or future support.
Loans & Debt
Business debt isn’t automatically a problem. The real question is whether debt is helping the business grow and whether repayments are manageable.
If borrowing is increasing, consider:
➡️ what the debt funded
➡️ whether it generated returns
➡️ how easily repayments can be supported
Healthy debt supports business growth. Uncontrolled debt can quietly become a major risk. Always consider whether debt is being used to purchase assets that will increase your overall profit. Using debt to purchase assets for a tax deduction, will usually only put additional pressure on cashflow without adding any additional revenue.
Tax Liabilities
One of the most overlooked sections of the Balance Sheet is money owed to the ATO.
This may include:
➡️ GST
➡️ PAYG withholding
➡️ Superannuation (where not paid on time)
➡️ Payroll tax (where applicable)
➡️ Income tax
Many business owners mistakenly view these amounts as available cash because the money is sitting in their bank account. In reality, these balances represent obligations that will need to be paid in the future.
If these balances continue to grow, it may be worth reviewing:
☑️ Pricing – Are your products or services priced appropriately to cover GST, tax obligations and other business costs? For example, a business may have set prices based on a GST-inclusive amount when they really needed to charge that amount plus GST.
☑️ Cashflow Management – Is enough money being set aside regularly to meet upcoming BAS, payroll and superannuation obligations when they fall due?
☑️ Budgeting and Profitability – Is the business generating sufficient profit to comfortably cover its tax obligations, or are tax debts gradually accumulating over time?
Remember: Just because the money is sitting in your bank account doesn’t mean it’s yours to spend.
Owner drawings and contributions
If you’re a sole trader or trust structure, you might regularly transfer money between yourself and the business.
Monitoring drawings helps answer questions like:
➡️ Are you taking too much out of the business?
➡️ Is the business generating enough profit to support those withdrawals?
➡️ Are personal expenses being mixed with business expenses?
The Balance Sheet often tells this story much more clearly than the P&L.
What does a healthy Balance Sheet look like?
Every business is different, but generally a healthy Balance Sheet will show:
✅ Sufficient cash reserves
✅ Manageable debt levels
✅ Tax obligations being paid on time
✅ Customers paying promptly
✅ Positive equity
✅ Assets increasing over time
When these indicators are moving in the right direction, your business is generally becoming stronger and more resilient.
Special considerations for STR businesses
For accommodation and short-term rental operators who don’t use trust accounting software, there are a few additional areas worth watching on the balance sheet, including:
Security deposits and bonds
Many STR businesses receive, hold, or manage funds that don’t actually belong to them. These might include security deposits, guest bonds, or other monies held on behalf of property owners or guests.
It’s important that these amounts are recorded correctly, as they can easily inflate bank balances and create a false impression of available cash.
When reviewing these balances, ask yourself:
❗ Are these funds still being held for a genuine purpose?
❗ Have any bonds or deposits been refunded but not cleared from the accounts?
❗ Does the balance agree with supporting records and trust account reconciliations (where applicable)?
A growing balance may be completely legitimate, but it’s worth ensuring these amounts are being actively monitored and accurately recorded.
Accumulating Clearing Accounts
Clearing accounts are often used to temporarily hold transactions while information is gathered or payments are processed. Examples may include:
➡️ Cleaning clearing accounts
➡️ Payment gateway clearing accounts
➡️ Accommodation platform clearing accounts
➡️ Payroll clearing accounts
A small balance is often normal. However, the true purpose of a clearing account is for funds to move in and out and ultimately “clear” to nil (or close to it).
If a clearing account continues to grow over time, it may indicate transactions aren’t being correctly finalised, reconciliations haven’t been completed, or there is a mismatch between funds coming in and funds going out.
This can be a result of:
❌ Transactions may not be flowing through the system correctly
❌ Reconciliations may be incomplete
❌ Income or expenses could be duplicated or missing
❌ Cashflow issues may be developing beneath the surface
As a general rule, clearing accounts shouldn’t become long-term storage locations for transactions. If a balance has been sitting there for months, it’s usually worth investigating to understand why the funds haven’t cleared as intended.
Growing “Suspense” Accounts
Most accounting systems contain accounts that become the home for transactions when nobody is quite sure where they belong. These might be called:
➡️ Suspense Accounts
➡️ Unknown Transactions
➡️ Unallocated Receipts
➡️ Owner Queries
➡️ Manager Funds
➡️ Miscellaneous Clearing Accounts
While these accounts can be useful as temporary holding areas, they should never become permanent storage for unresolved transactions. If these balances continue to grow, it can indicate:
❌ Transactions haven’t been reviewed properly
❌ Reconciliations are incomplete
❌ Income or expenses may be recorded incorrectly
❌ Important issues may be hidden within the balance
Think of these accounts like a junk drawer. Having one isn’t necessarily a problem, but if everything ends up in there, finding what you’re looking for becomes much more difficult. A healthy suspense account balance is usually a small balance that’s reviewed and cleared regularly, rather than one that continues to accumulate month after month.
Seasonal Cash Reserves
Many businesses experience fluctuations throughout the year, but this is especially common in the short-term rental industry where occupancy and revenue can vary significantly between seasons.
A healthy Balance Sheet should show sufficient cash reserves to help the business manage:
❗ Quieter booking periods
❗ Temporarily funding property costs prior to reimbursement
❗ Unexpected expenses
❗ Tax and superannuation obligations
The key question isn’t just “How much cash do we have today?” but rather:
Do we have enough cash to comfortably get through the next quiet period without placing the business under pressure? Building cash reserves during stronger months can help provide stability when revenue slows.
Garbage in, garbage out
Just like your P&L, your Balance Sheet is only useful if the underlying data is accurate. A few simple ways to improve reliability:
Keep your bookkeeping up to date and don’t let transactions pile up. Keeping your records updated regularly (at least monthly) ensures your Balance Sheet reflects real-time business performance, helping you catch issues early rather than scrambling at tax time.
Unpaid invoices and supplier bills tell an important cashflow story. Regularly reviewing what customers owe you, and what you owe others, can help identify collection issues, overdue accounts, and potential cashflow pressure before they become bigger problems.
Ensure loans are coded correctly – these balances should accurately reflect what is still owed. Incorrectly coded loan repayments & interest can distort both your Balance Sheet and Profit & Loss, making it difficult to understand your true financial position.
Tax liabilities such as GST, PAYG Withholding, Superannuation and Income Tax can build up quickly if left unchecked. Regular reviews help ensure you’re setting aside enough cash to meet these obligations and avoid unexpected surprises when payment deadlines arrive. Keeping an eye on your ATO account can also help you stay on top of due dates and avoid missed lodgements or payments.
Not every business purchase should be treated as an expense. Assets such as vehicles, equipment, computers and furniture often provide value over several years and should be recorded appropriately to ensure your reports remain accurate.
Your financial reports are only as good as the information behind them. If a balance looks strange, don’t assume it’s correct. Taking the time to investigate unusual balances can uncover errors, missing transactions or insights that would otherwise go unnoticed.
Your P&L tells you how you performed…..your Balance Sheet tells you how strong you are.
The two reports work together. Your P&L shows whether you’re making money. Your Balance Sheet shows whether you’re building wealth, managing debt responsibly, and creating a sustainable business.
A business can be profitable and still have cash flow problems. A business can have strong sales but be carrying dangerous levels of debt. That’s why understanding both reports is so important.