If the term “Balance Sheet” sounds like financial jargon—we get it. Words like ‘assets’ and ‘liabilities’ don’t spark the same excitement as ‘revenue’ and ‘profit’.
But just because it doesn’t get the same attention as the P&L doesn’t make it any less important. In fact, it’s one of the key financial statements that offers a clear snapshot of your agency’s financial health.
Think of your Balance Sheet as a snapshot of your agency: it shows what you own, what you owe, and the equity you’ve built over time.
Instead of just filing it away, we’ve outlined the most important things you should look for, so you can use your Balance Sheet to make smarter decisions for your agency.
Why is a Balance Sheet Important?
As mentioned, a Balance Sheet gives you a snapshot of your agency’s financial health at a specific point in time. It shows what you own (your assets), what you owe (your liabilities), and the value that’s left over (your equity).
In contrast, the P&L (Profit and Loss) statement tells you how much money your agency has made or lost over a period, like a month or a year. The P&L focuses on your revenue and expenses, while the Balance Sheet shows what your business owns and owes at a specific moment.
You’d look at the P&L to see if your agency is profitable, but the Balance Sheet gives you a broader view of your business’s overall financial health. For instance, if you’re considering expansion, taking on a new project, or making a big purchase, the Balance Sheet helps you determine if you have the resources to move forward.
It’s called a “balance” sheet because it must always balance: the value of your assets should equal the combined total of your liabilities and equity. Simply put, what you own must match what you owe plus the equity you’ve built.
Let’s look at each part in detail:
Assets
Assets are what your agency owns or controls that have value. Think of them as the resources that help your business run.
On your Balance Sheet, assets are usually split into two types: current and noncurrent.
- Current assets are things that can be easily turned into cash within a year, like money you’re owed (accounts receivable), prepaid expenses like software subscriptions, or rent you’ve paid in advance.
- Noncurrent assets are things that take longer than a year to convert into cash, think office equipment or intellectual property.
For most digital agencies, cash and accounts receivable are the most important current assets because they show how quickly you can pay for day-to-day expenses. Noncurrent assets, while important, can limit your flexibility if you invest too much in them, as it might make it harder to manage your cash flow.
Liabilities
Liabilities are what your agency owes—usually money. These are things like bills to be paid (accounts payable), loans or unearned revenue.
Unearned revenue is where a lot of digital agencies get tripped up. Unearned revenue is revenue that has already been paid to you, but you service that revenue over a longer period, say a quarter or a year. The problem is that the cash has hit your bank, but you still have payroll and expenses in future months that need to be budgeted for. Recognizing all of this revenue upfront can cause major cash flow issues down the line.
Similarly, you’ll find the media spend liability here. This is if you pay for your client’s advertising on their behalf. Often I’ll see a client pay for this upfront and it is recognized as revenue. This creates a misleading view since those funds are spoken for and will need to be set aside to pay the media vendors.
Like Assets, Liabilities are also split into current (due within a year) and noncurrent (due after a year).
Having more assets than liabilities makes your agency look financially healthier. But if liabilities are higher than assets, you may struggle to pay bills, which can affect cash flow and make it harder to grow or take on new projects.
Equity
Finally, equity is what’s left after you subtract liabilities from assets. In simple terms, it’s the cash value of your business after paying off all your debts, and it represents your ownership in the agency.
Think of it as the amount of cash you can take out of your agency today if you really wanted to.
When looking at the equity section of the Balance Sheet, two important things to focus on are retained earnings and owner’s equity:
- Retained earnings are profits kept in the business instead of being paid out to owners.
- Owner’s Equity is the money you or other owners have contributed and distributed from the agency.
Key Metrics to Watch on Your Agency Balance Sheet
When you’re looking at your Balance Sheet, it can feel a little overwhelming.
So, what should you actually pay attention to?
Here are some important metrics that can give you a quick read on your agency’s financial health.
1. Current Ratio
Formula: Current Assets ÷ Current Liabilities
This ratio shows if your agency has enough money and assets to pay off its short-term bills. If the ratio is above 1, it generally means you’re in a good position to cover your upcoming expenses.
To keep this ratio healthy, try to set aside some cash by managing your spending and saving part of your profits. You can also speed up how quickly clients pay you by offering discounts for early payments or sending reminders. Reducing your short-term debts, like credit card balances, or negotiating more time to pay bills can also help.
2. Debt-to-Equity Ratio
Formula: Total Liabilities ÷ Total Equity
This ratio shows how much of your agency’s activities are funded by debt compared to your own investment. A lower debt-to-equity ratio means you’re relying less on borrowing, which generally makes your agency more financially stable.
You want to keep debt at a level that can be easily paid off by your agency’s income, without putting too much pressure on your cash flow. For many agencies, a debt-to-equity ratio below 1 is considered healthy, meaning you have more equity than debt.
The key is to avoid taking on so much debt that it limits your ability to grow or handle unexpected expenses.
3. Accounts Receivable Turnover
Formula: Net Credit Sales ÷ Average Accounts Receivable
This metric shows how quickly your agency collects payments from clients. A higher turnover means you’re getting paid faster, which is great for keeping cash flowing smoothly.
If your turnover is low, it may be worth revisiting your payment terms or following up with clients more often. As a general target, aim for an accounts receivable turnover ratio of 5 to 10, meaning you’re collecting payments within 30 to 60 days. Faster payments mean more cash available to reinvest in your business and cover expenses.
You can learn more about the importance of this ratio in our previous blog which covers the main KPIs that marketing agencies should be looking out for.
So, When Is The Agency Balance Sheet Important?
While you don’t need to check your Balance Sheet every day, it’s a good idea to review it at the end of each month. Here are a few key moments when your Balance Sheet becomes really important for your business:
- Selling Your Business: If you’re thinking about selling, potential buyers will closely review your Balance Sheet to assess your agency’s financial health. They’ll want to see what assets and debts they’d be taking on, how much equity is in the business, and whether your agency is financially stable.
- Securing Loans or Investment: Lenders and investors use your Balance Sheet to determine if your business is a good risk. A strong Balance Sheet can help you get better loan terms or attract investors.
- Planning for Growth: If you’re thinking about expanding, hiring more staff, or taking on a big project, your Balance Sheet can help you determine if you have the financial capacity to do so.
- Managing Day-to-Day Finances: Even in your daily operations, the Balance Sheet helps you keep an eye on your financial position. It shows whether you have enough assets to cover your short-term bills and manage any outstanding debt.
Need Additional Help Understanding Your Agency Balance Sheet?
To wrap things up, here are some of the most common items to keep an eye on in your Balance Sheet:
- Assets: What your agency owns, such as cash, equipment, or accounts receivable.
- Liabilities: What your agency owes, like bills, loans, or unearned revenue.
- Equity: The value left after subtracting liabilities from assets—essentially, your stake in the business.
Understanding these basics will give you a clearer picture of your agency’s financial health.
If you ever need help going through your agency’s numbers or have questions, feel free to reach out! It’s what we’re here for.
At Agency CPAs, we specialize in growing and scaling million-dollar agencies, and managing the year-round accounting to make sure you’re keeping as much money in your pocket as possible.
You can easily book a quick introductory call by using the calendar below.
Until next time!
