To read a good balance first, you have to understand its architecture. Behind each figure there is a simple but powerful accounting logic that, once understood, will allow you to identify risks, opportunities and imbalances in the financial structure of your company.
the base equation
The basic balance sheet formula is simple but powerful:
Assets = Liabilities + Equity
This means that everything you have (assets) was financed in some way: either with your own money (equity) or with debts or obligations (liabilities).
The key is to find a healthy balance between those sources of financing. A business with too much debt is at risk of illiquidity or insolvency. One with very little leverage may be missing out on growth opportunities.
Assets: What does the company have?
They represent all the goods and rights that the company owns and that can be converted into money or that generate value to operate. They are the ‘what do I have’ of the business, but they also reflect where the invested capital is located. An asset can be physical—a warehouse, machinery, or merchandise—or intangible—a trademark, license, or right of use. The key is not only to have assets, but that they are productive.
- Current assets: Cash and banks, accounts receivable, inventories and other assets that are expected to be converted into cash or used in the short term, usually within the year.
- Non-current assets: property, plant and equipment, long-term investments, intangible assets, among others. Some generate value in the long term, but do not contribute to immediate liquidity.
Liabilities: What should the company.
They are all obligations or payment commitments that the company has with third parties. That is, the “what should I”. They can finance growth and operations, but they must be well structured so as not to generate imbalances. A healthy liability is one that has a clear reason for being, an affordable cost and a payment plan in accordance with the financial capacity of the company.
They are classified as current liabilities (short term) and non-current (long term).
Another useful way to analyze them is to ask whether or not they generate interest. When a liability generates interest, we speak of an onerous liability: it occurs, for example, when the company takes a bank loan, issues a bond or acquires a financial leasing, that is, it uses money from a third party and must pay for it, generally in the form of interest. These liabilities have an explicit financial cost and affect both income statement and cash flow.
On the other hand, when a liability does not generate interest, we speak of a non-onerous liability. It does not have a direct financial cost, but it is still an obligation that the company must fulfill, such as paying suppliers, taxes, payroll or guarantees. Although they do not generate interest, they do impact daily operation and cash flow.
Understanding this difference helps the employer to prioritize decisions, assess risks, and have a clearer reading of the financial health of your business.
| Criterion | onerous liabilities | non-onerous liabilities |
| Do they generate interest? | Yes, contractual or implicit. | They do not generate interest. |
| Nature of the passive | financial | operational, legal or contractual. |
| main origin | Financing: Loans, Bonds, Leasing. | Business operations, labor obligations, tax. |
| associated financial cost | Yes, it is recorded as a financial expense. | No, although there may be penalties for default. |
| Impact on results | Yes, for the interests. | not directly, although it can influence provisions |
| Impact on cash flow | Financial: Interest payments and amotization. | Operating: Payments to suppliers, taxes, employees. |
| Does it require a guarantee or collateral? | Often yes (for example, bank loans). | It is not usually required. |
| Typical examples | Bank loans, bonds issued, financial leasing. | Accounts payable to suppliers, taxes, provisions. |
| associated risk | Financial risk (interest rate, refinancing). | operational or legal compliance risk. |
| Use in financial analysis | Evaluation of capital structure and leverage. | Analysis of working capital and operating flow. |
Heritage: what is really yours.
It is the part of the company that belongs to the partners or shareholders. It represents own resources and is also an indicator of long-term financial health. A strong equity implies that the company has generated value, reinvested profits or received consistent contributions. When the equity is low or negative, it can indicate accumulated losses or excessive dependence on debt.
The limitations you must take into account
Although it is a valuable tool, the balance has some limitations. It does not always reflect the real value of assets: goods such as land, brands or intellectual property can have a very different market value than the registered book value. It also does not show the quality of the assets, the health of accounts receivable or if the inventories are obsolete. That is why it is important to complement it with other financial statements and additional analysis: cash flows,
margins and asset turnover.
Clarus Council: Knowing what your balance is made of is the first step. The next, and the one that really generates value, is to learn to read it with a strategic vision.
At Clarus Consultores we accompany entrepreneurs to understand the financial structure of their business with the rigor of a senior financial direction. Write us If you want to review the composition of your balance together.