The Balance Sheet

If the P&L tells you whether the business made money, the balance sheet tells you what the business owns and owes at a specific point in time. The fundamental equation is Assets = Liabilities + Equity. This equation always balances — it is an identity, not a goal. Every dollar the company has came from either borrowing (liabilities) or ownership investment (equity), and every dollar is deployed as an asset. That is the entire balance sheet in one sentence.

1. Current Assets Cash, accounts receivable (money customers owe you), and short-term investments — anything that converts to cash within 12 months. For SaaS companies, accounts receivable is the number to watch. High AR relative to revenue means you are booking sales but not collecting cash. That gap kills companies.
2. Current Liabilities Accounts payable (money you owe vendors), deferred revenue (subscription payments you collected but haven't earned yet), and short-term debt. Deferred revenue is counterintuitive: it is a liability because you collected cash but owe future service. For a healthy SaaS company, growing deferred revenue is a good sign — it means customers are pre-paying.
3. Working Capital Current assets minus current liabilities. Positive working capital means you can cover near-term obligations. Negative working capital means you are funding operations with future revenue or debt. The working capital ratio (current assets / current liabilities) should be above 1.0. Below 1.0 and you are living on borrowed time — literally.