What to cultivate before Bookkeeping Level 3: The ability to read financial statements and decide 'what to do'

"Let's have our presidents and executives get Bookkeeping Level 3 certification first."
I often hear this in small and medium-sized enterprises. Studying bookkeeping itself is very important, and I am not against it. However, I also feel it is a bit risky to think that "passing Bookkeeping Level 3 means you can read financial statements" or "means you can make management decisions."

What bookkeeping teaches is a world of rules on "how to journalize transactions and how to aggregate them."
On the other hand, what managers and executives truly need is the ability to read and turn into material for management decisions things like:
• What kind of company structure and financial strength does this balance sheet (BS) represent?
• Which business or operational movements are affecting which figures in this profit and loss statement (PL)?
• If we continue with these figures, what is likely to happen in the future, and what should we change now?

In other words, the "ability to journalize" and the "ability to think of countermeasures from financial statements" are different things, even if they seem similar.

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Bookkeeping is the basic physical strength needed to understand the "foundation"


Of course, there is great significance in learning bookkeeping.

This is because financial statements are the result of accumulation according to bookkeeping rules, and without knowing the foundation, it is difficult to see the "story behind the numbers." • Why is "accounts receivable" recorded the moment sales are booked, even though payment has not yet been received? • Why are there expenses like "depreciation" that do not involve cash outflow?

• Why does cash flow become difficult when inventory increases, even if a profit is being made?
The depth of understanding for these questions changes completely depending on whether or not you know the basics of bookkeeping.
Therefore, bookkeeping is an important basic physical strength for understanding the "foundation of financial statements."
However—and this is an important point—just because you studied bookkeeping does not mean you will "become able to make management decisions."
It is the same as how just doing muscle training does not necessarily mean you will become good at playing a soccer match.

What is needed in a match is the ability to "look at the situation and decide where to pass" or "when to shoot." I think it is better to view bookkeeping as something closer to the muscle training that precedes that.
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What managers need is the ability to "look at numbers and decide what to do"


So, what is the "managerial numerical ability" that should be cultivated before or in parallel with Bookkeeping Level 3?
From my own experience, it centers on the following three points:

1. The ability to grasp the balance sheet as "boxes"

• Visualize assets, liabilities, and net assets as "boxes" according to the size of the amounts. • Get a sense of "where the company is investing its money (assets) and where it is procuring funds (liabilities/net assets) from." • Judge financial strength and risk by looking at the "structure" such as the equity ratio and interest-bearing debt.

2. The ability to connect PL figures with operational movements
• Think of sales, gross profit, SG&A expenses, and operating profit in connection with products, business partners, departments, etc.
• Re-question, "Was this expense really necessary to generate this sales and this profit?"
• Develop the habit of looking for "where to tweak for the most impact," rather than just looking at red/black ink.
3. The ability to use numbers to simulate "what if?"
• "If we discontinue this loss-making business, how will the BS and PL change?"
• "By making this investment, what will happen to profits and the outstanding loan balance in three years?"
• "If we increase personnel costs by X%, will the labor share ratio and profitability hold up?"
These three can be acquired through training, even if you cannot make a single journal entry.
In fact, I feel that for executives and the next president, cultivating the "quality of decision-making" is more directly linked to the overall results of the company than "correctness of journal entries."
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How to cultivate it? Use training close to actual practice


I will write about specific training methods in detail in another article, but I will just convey the direction here.
• Try drawing your company's current balance sheet as "boxes" by hand.

• Line up financial statements from the past three years and try to verbalize "how the physique has changed over these three years."

• Practice examining "what if" scenarios based on numbers, using actual investment or withdrawal proposals as subjects. • Review with frontline executives, "What was happening on the ground behind these changes in numbers?"Such training does not appear much in bookkeeping textbooks.

However, I am convinced that the "numerical muscles" needed to fight in the management field are grown through this kind of practical training.
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Summary: Bookkeeping Level 3 is not the goal, but the "entrance to the entrance"


To avoid misunderstanding, I do not mean to say that Bookkeeping Level 3 has no value.
Rather, it is a very good teaching material for understanding the foundation of financial statements.

However, I think the return for the company, the president, and the executives is far greater if you think in the order of:

• Not "once I get Bookkeeping Level 3, I can rest easy" • But "while grasping the 'foundation' through bookkeeping, repeatedly practice using financial statements for management decisions"Next time, I would like to write about specific training methods in the form of "'Balance Sheet Box Training' you want to do before bookkeeping."