The Importance of Balance Sheets for Sole Proprietors and Small Businesses

I get this question a lot from clients, especially sole proprietors or single-member LLCs who file a Schedule C:

"Why do I need QuickBooks or accounting software? I just have an Excel sheet with my profit and loss, revenue, and expenses."

In other words, they’re asking: “Do I really need a balance sheet?”

Even some S Corps struggle to understand the importance of a balance sheet. The short answer is: yes, you do.

A profit and loss (P&L) statement shows your revenue and expenses—but it doesn’t capture everything. Other items, like loan principal payments or large equipment purchases that need to be capitalized, aren’t fully reflected on the P&L right away. Instead, these are tracked on the balance sheet, often through depreciation.

Your distributions—money you take to pay yourself—also appear on the balance sheet. As a sole proprietor, you can’t deduct your own pay on the P&L, so the balance sheet is where this information lives.

Bank balances, credit cards, and lines of credit are also critical to track. How much do you owe? What’s your business’s net worth? These are all captured on the balance sheet. Assets minus liabilities equal equity—and equity gives you a clear picture of your financial health.

Retained earnings—the cumulative net profit your business has earned, minus any losses or distributions—also live here. A good bookkeeper reconciles these accounts monthly and alerts you if anything needs attention.

Why the Balance Sheet Matters

The balance sheet is just as important, if not more so, than the P&L in many cases. It helps you:

• Know your business’s financial position

• Track KPIs and metrics to assess health

• Spot trends like growing equity or declining cash flow

Even a simple balance sheet provides valuable insight. Here are some key metrics to focus on:

• Net Worth: Total assets minus total liabilities. Shows what your business is truly worth.

• Debt-to-Asset Ratio: Total liabilities ÷ total assets. Shows how leveraged your business is.

• Working Capital: Current assets minus current liabilities. Indicates short-term financial health.

Tracking these over time helps you make smarter decisions without needing fancy accounting software.

Bottom line: A balance sheet gives you a complete financial picture. Every business—even a sole proprietorship—benefits from knowing exactly where they stand. And a good bookkeeper will help you stay on top of it.