Why every entrepreneur should know how to read a balance sheet
The balance sheet is a snapshot of your company's financial position at a specific date. It shows what you own (assets), what you owe (liabilities) and the value of shareholders' equity. In Switzerland, the Code of Obligations (CO, art. 957–963) requires proper bookkeeping for all businesses registered in the Commercial Register with revenue exceeding CHF 500,000.
Many entrepreneurs delegate accounting entirely to their fiduciary — which is perfectly legitimate — but in doing so they give up a fundamental decision-making tool. Reading a balance sheet doesn't mean becoming an accountant: it means understanding whether your business is growing healthily, whether it has sufficient liquidity, and whether debt is under control.
This guide walks you step by step through reading a balance sheet in Swiss CO format, the income statement and the key financial ratios — with formulas, healthy ranges and warning signs. By the end you'll know exactly what to ask your fiduciary and which numbers to monitor every month.
The balance sheet in 5 minutes
The balance sheet is based on a fundamental equation: Assets = Liabilities + Equity. Here are the three components:
Assets (left side)
Everything the company owns or is owed: cash, bank accounts, trade receivables, inventory, machinery, real estate, patents. They're divided into current assets (convertible to cash within 12 months) and fixed assets (long-term investments).
Liabilities (right side — debts)
Everything the company owes to third parties: trade payables, bank loans, leasing obligations, tax liabilities, provisions. They're divided into short-term liabilities (due within 12 months) and long-term liabilities (mortgages, bonds).
Equity (right side — net worth)
The difference between assets and liabilities: it's the net value of the company belonging to shareholders. It includes share capital, legal reserves, retained earnings and the current year's profit/loss. Higher equity means greater financial strength.
Assets and liabilities: CO balance sheet structure
The balance sheet under the Swiss Code of Obligations (art. 959a) has a mandatory minimum structure. Here are the five main categories:
| Category | Typical examples | What it indicates |
|---|---|---|
| Current assets | Cash, bank, trade receivables, inventory, prepaid expenses | Resources convertible to cash within 12 months. The higher they are relative to short-term liabilities, the better: it means you can pay your bills without difficulty. |
| Fixed assets | Machinery, vehicles, real estate, patents, goodwill | Long-term investments that generate value over time. They are depreciated annually — if depreciation is too low, the balance sheet may overstate the real value. |
| Short-term liabilities | Trade payables, VAT due, current taxes, wages payable | Obligations to be settled within 12 months. If they grow faster than current assets, liquidity is at risk. |
| Long-term liabilities | Mortgages, bank loans, finance leases | Financing with maturity beyond 12 months. A moderate level is normal — but if they exceed equity, the company is financed more by creditors than by shareholders. |
| Equity | Share capital, legal reserves, retained earnings, current year profit | Shareholders' net worth. It's the company's safety cushion: the higher it is relative to total assets, the more solid and independent the company is. |
The income statement: where profit comes from
The income statement (art. 959b CO) shows revenues and costs for a period — usually a fiscal year. Here are the five key line items to monitor:
Net sales revenue
Total turnover net of discounts, returns and VAT. It's the first line of the income statement and the basic measure of business activity. Compare it year over year to understand whether the business is growing.
Gross margin (gross profit)
Revenue minus cost of goods sold (raw materials, purchased goods, direct production costs). It shows how much you earn per franc of turnover before overheads. A declining gross margin signals pricing pressure or rising procurement costs.
EBITDA (operating result before depreciation and interest)
The operating result before depreciation, interest and taxes. It measures the company's pure operational profitability — it's the preferred metric for banks and investors because it eliminates accounting distortions.
Financial result
Interest income minus interest expenses, foreign exchange gains and losses, dividends from participations. A very negative financial result indicates a high cost of debt — be cautious if the interest-to-EBITDA ratio exceeds 30%.
Net profit (or loss)
The final result after all expenses, depreciation, interest and taxes. It's the amount that can be distributed as dividends or reinvested in the business. If it's negative for consecutive fiscal years, equity erodes.
The 6 financial ratios every entrepreneur must know
Financial ratios turn balance sheet numbers into actionable insights. Here are the six most important for a Swiss SME, with formula and healthy range:
Current Ratio
Current assets ÷ Short-term liabilities
✓ Healthy: between 1.5 and 2.0
Measures the ability to pay short-term debts with available resources. Below 1.0 means you don't have enough liquid assets to cover imminent obligations — a serious warning sign.
Equity Ratio
Equity ÷ Total assets × 100
✓ Healthy: > 30% (ideal > 40%)
Shows the percentage of assets financed with own funds. The higher it is, the less the company depends on creditors. Below 20% the situation becomes fragile — banks may require additional guarantees.
ROE (Return on Equity)
Net profit ÷ Equity × 100
✓ Healthy: > 8–12% for an SME
Measures the return on capital invested by shareholders. If ROE is lower than a savings account rate, shareholders would be better off investing elsewhere. A very high ROE with low equity ratio may indicate excessive financial leverage.
Debt Ratio
Total liabilities ÷ Total assets × 100
✓ Healthy: < 70% (ideal < 60%)
The complement of the equity ratio: shows how much of assets is financed by third parties. Above 70%, the company is heavily indebted and vulnerable to rising interest rates or revenue declines.
Quick Ratio (Acid Test)
(Current assets − Inventory) ÷ Short-term liabilities
✓ Healthy: > 1.0
Like the current ratio, but excludes inventory (which may not be quickly sellable). It's the most stringent liquidity test: below 1.0, you may struggle to pay debts even after selling everything immediately liquidable.
EBITDA Margin
EBITDA ÷ Net sales revenue × 100
✓ Healthy: > 10–15% (varies by industry)
Measures how many centimes of operating profit you generate per franc of turnover, before depreciation and interest. Useful for benchmarking against competitors and monitoring operational efficiency over time.
5 warning signs in the balance sheet
Here are the signals that should make you investigate immediately — even if you're not an accounting expert:
- Negative or steadily declining equity: means the company has more debts than assets. In Switzerland (art. 725 CO), if losses exceed half of share capital the board must call an extraordinary general meeting — and if over-indebted, must notify the court.
- Current ratio below 1.0 for two consecutive quarters: the company cannot cover short-term debts with current assets. Concrete risk of insolvency or need to resort to emergency credit on unfavourable terms.
- Trade receivables growing faster than revenue: clients are paying later and later or there are uncollectible debts not yet written down. Check the receivables aging: if over 20% is overdue by more than 90 days, the problem is serious.
- Negative EBITDA or EBITDA margin declining for 3+ quarters: the core business isn't generating profit — the business model may not be sustainable at current volumes and costs.
- Trade payables constantly increasing: the company is delaying payments to preserve cash. This is a sign of financial stress that can damage commercial relationships and lead to worse supply terms.
From PDF to dashboard: understanding the numbers at a glance
Receiving the balance sheet as a 20-page PDF from your fiduciary is useful for the archive — but not for making decisions. Modern accounting software transforms data into interactive dashboards that make everything immediately understandable:
What a modern financial dashboard offers
- Balance sheet and income statement updated in real time, with prior year comparison and budget variance — no need to wait for the fiduciary's monthly closing
- The 6 key financial ratios calculated automatically with green/yellow/red traffic lights — you can immediately see if something is off track
- Cash flow trend chart with 30/60/90-day projection — you know in advance if you'll face liquidity issues
- Receivables and payables aging with automatic alerts on due dates — no more surprises about unpaid invoices
- Automated reports sent to your email every Monday morning — you start the week knowing exactly where you stand
With AccountEX you can connect your bank account, import invoices with OCR and visualise balance sheet, income statement and financial ratios in a clear, real-time dashboard — without waiting for the fiduciary's monthly report.
7 practical tips for entrepreneurs
- Ask your fiduciary for an interim balance sheet every quarter — not just at year-end. Financial problems are better resolved when caught early. The additional cost is minimal compared to the value of the information
- Monitor the current ratio and cash flow every month. These are the two numbers that tell you whether you can pay salaries, suppliers and VAT without surprises. If the current ratio drops below 1.2, act immediately
- Always compare the balance sheet with the prior period and the budget: absolute numbers say little, it's the variations that tell the story. Is a profit of CHF 50,000 good or bad? It depends on whether last year it was 80,000 or 20,000
- Don't confuse profit with cash: you can have a profitable balance sheet and no money in the bank (because clients haven't paid yet or you invested in machinery). Cash flow is king
- Check the receivables aging at least once a month. Every invoice overdue by more than 60 days has a significantly higher probability of never being collected — follow up promptly
- If the equity ratio drops below 30%, talk to your bank before you urgently need credit. Negotiating from a position of strength is far more advantageous than requesting an emergency loan
- Use software like AccountEX to have balance sheet and financial ratios always up to date in a clear dashboard. When you understand the numbers, you make better decisions — and the dialogue with your fiduciary becomes much more productive
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