What you own, what you owe, and what is left. A snapshot rather than a period — and the one that has to balance.
10 min read · Level 3
The balance sheet is where two things hide that founders routinely spend by accident: money customers owe you that may never arrive, and money you have collected for work you have not done. Cash in the bank is not the same as cash that is yours. A company that has consumed its deferred revenue is solvent right up until customers ask for the service they already paid for.
The balance sheet is a photograph at one moment:
Assets — what you own: cash, money owed to you, equipment. Liabilities — what you owe: unpaid bills, loans, deferred revenue. Equity — the difference, belonging to shareholders.
And always: Assets = Liabilities + Equity. If it does not balance, the books are wrong.
Because it shows position, not performance. The P&L says how you did last month; the balance sheet says where you stand today.
It is also where two things hide that founders routinely miss: how much of your 'revenue' is actually still owed to you, and how much of your cash is money you have been paid for work you have not yet delivered.
ASSETS Cash $180,000 Accounts receivable $64,000 Equipment $6,000 Total assets $250,000 LIABILITIES Accounts payable $22,000 Deferred revenue $48,000 Total liabilities $70,000 EQUITY $180,000
Two things worth noticing.
$64,000 of receivables — real money, but not yet yours to spend. If most of it is 90 days overdue, this is a problem dressed as an asset.
$48,000 of deferred revenue — customers paid upfront for a year and you owe them eleven more months of service. It sits in your bank account and it is a liability, not profit. Companies that spend it as though it were earned get into serious trouble when customers ask for refunds.
First-time founders often see cash in the bank and assume it is all theirs to spend. Annual prepayments make that badly wrong — a healthy-looking balance can be mostly deferred revenue you still owe as service.
The other one: treating a growing receivables balance as growth. It might be growth, or it might be customers who have stopped paying you.
The most important line. Everything else is context around it.
How much are you owed, and how overdue? Anything past 60 days deserves a phone call today.
Money received for service not yet delivered. Subtract it mentally from cash to see what is really free to spend.
Payables due this month matter far more than the total.
Assets should equal liabilities plus equity. If your software says otherwise, that is a bookkeeping problem to fix now, not later.
Quarterly for most early startups, monthly once you have meaningful receivables, deferred revenue or debt.
Pre-revenue with no debt, the balance sheet is almost entirely 'cash' and tells you little the bank app does not. Do not spend time on it yet.
A receivables balance climbing from twenty to sixty-four thousand while revenue stays flat is not growth — it is the same sales converting to cash more slowly, or not at all. Founders see a big number on the assets side and feel good about it.
Watch receivables as a ratio to revenue, not as a level. Rising with flat revenue is a collections emergency in slow motion.
Annual prepayments produce the largest bank balance a young company has ever had, and it is mostly a liability. The companies that get into trouble spend it as though the year's work were done, then face a cash-flat six months with the service obligation still running.
Subtract deferred revenue from cash before deciding what you can afford. What is left is what is actually yours.
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