Why Is It Difficult Despite Having Many Assets? Reading the Balance Sheet Through the Four Classifications of Current and Fixed
Chapter 1: The Reason Why I Didn't Understand Anything Even After Looking at the Financial Statements
The numbers are lined up, but the meaning is invisible
How do you feel when you receive financial statements from your tax accountant?
You accept them with a "thank you," take a quick look, and put them on a shelf. Actually, there are many people who do that.
That is actually very common.
The numbers are lined up. The totals are also there.
But I don't really understand what they mean for my company.
Having this feeling itself is not strange.
This is because financial statements are created as "reports" and are not designed as "tools for management decision-making."
The real reason why you don't understand
The reason you cannot read financial statements is not because you lack the ability to read them.
It is because you have not been taught the structure you should be looking atis the reason.
The numbers lined up on the balance sheet also change completely in how they are read just by having the perspective of dividing them into 4 groups.
The way you read them changes completely just by having the perspective of dividing them into four groups.
Those groups are the four: current assets, fixed assets, current liabilities, and fixed liabilities.
Those groups are the four: current assets, fixed assets, current liabilities, and fixed liabilities.
Chapter 2: Assets are divided by whether they can be used immediately
What are current assets?
Assets are broadly divided into two types.
The criterion for division is "whether they will turn into cash within one year."
Current assets areassets that turn into cash in a relatively short period of timethings.
To list representative examples,
Cash and deposits
Accounts receivable (money that has been billed but not yet collected)
Inventory assets (stock)
Accounts receivable is 'money that is not yet on hand but will come in soon.'
Inventory is 'stock that will become cash if sold.'
Both have the property of turning into cash over time.
What are fixed assets?
On the other hand, fixed assets are assets that do not immediately turn into cash.
Buildings and land
Machinery and vehicles
Intangible assets such as software and patents
These are held to continue business operations and are not intended to be sold for cash.
They are not premised on being sold to become cash.
Even if you own land or buildings, they are not 'money you can use tomorrow.'
This is important.
Why the difference between the two is directly linked to management decisions
Some people have the feeling that 'a company with many assets is safe,' but if you don't look at the contents of the assets, that feeling is dangerous.
A company with only fixed assets and few current assets will be in a state where,
even if assets are abundant on the books,
there is little money on hand to move.
For example,
Total assets: 20 million yen
Of which land/buildings: 16 million yen
Of which cash/accounts receivable: 4 million yen
This company is a '20 million yen asset company,' but the amount that can be used for tomorrow's payments is limited to 4 million yen.
The 'quality' of assets rather than the 'quantity,' in other words, whether they are easily converted into cash, is directly linked to management flexibility.
Chapter 3: Liabilities are divided by 'when they will be repaid'
What are current liabilities?
Liabilities are also divided into two categories based on the same criteria as assets.
That is, "whether repayment is required within one year."
Current liabilities are debts that must be paid in the near future.
Accounts payable (unpaid purchase costs)
Short-term loans (debts to be repaid within one year)
Accrued expenses (unpaid personnel costs and expenses)
These have a short time frame.
Therefore, the larger the current liabilities, the higher the demand for funds in the near future it means.
What are fixed liabilities?
Fixed liabilities are debts with a longer time frame until repayment.
Long-term loans (debts with a repayment period of over one year)
Corporate bonds
For example, a bank loan with a five-year repayment term is a fixed liability.
Although monthly repayments occur, the entire amount does not need to be repaid immediately.
Fixed liabilities are "debts you live with for a long time," and
they do not put as much immediate pressure on funds as current liabilities.
Repayment timing dictates cash flow
Even with the same "10 million yen in debt,"
the company's financial situation is completely different depending on whether the content is short-term or long-term.
Short-term loan of 10 million yen → Must be repaid within this year
Long-term loan of 10 million yen → Can be repaid over 5 to 10 years
The former is a problem that must be addressed immediately, while
the latter is a problem that can be handled systematically.
Instead of judging based only on the "total amount" of borrowing,
the ratio of current to fixed you need to make it a habit to check.
Chapter 4: What Can Be Seen from the Balance Between Assets and Liabilities
The relationship between current assets and current liabilities
When you line these two up, something very important becomes visible.
If Current Assets > Current Liabilities then there is short-term payment capacity.
If Current Assets < Current Liabilities then there is a risk of running out of funds in the near future.
The numerical representation of this relationship is the "current ratio."
Current Ratio = Current Assets / Current Liabilities
Generally, if it exceeds 100%, it is judged that there is short-term solvency.
If it is below 100%, it is a sign that improvement in cash flow management is necessary.
The true nature of a company that is struggling despite having many assets
Here, let's return to the initial question.
"Why are you struggling despite having many assets?"
The answer is this.
There are too many fixed assets and too few current assets.
And, there are many current liabilities.
In this state, even if it looks like a fine company on the books,
the reality is that there is not enough money to pay for this month's or next month's expenses.
This state often occurs in restaurants and manufacturing industries that have invested too much in equipment.
If you have ever had the feeling that you have a fine kitchen or machinery, but paying for inventory costs is barely making it every month, you are in exactly this pattern.
Chapter 5: How to View Your Own Company's Balance Sheet
Perspective for Self-Diagnosis
There are three things I want you to pull out your financial statements and check right now.
What is the ratio of current assets to fixed assets?
What is the ratio of current liabilities to fixed liabilities?
Do current assets exceed current liabilities?
Even if you can only check these three points,
you will be able to roughly see the "current state" of your company's finances.
What to check next
Once the structure becomes visible, the following questions naturally arise.
"When the current ratio is below 100%, where should action be taken?"
"If there are too many fixed assets, how should it be handled?"
"How can one switch from a state of high short-term borrowing to long-term?"
These are questions that can only be designed once you have the foundation of the four classifications.
In the next article, we will explain:
The appropriate level and danger line for the current ratio
How to balance short-term and long-term borrowing
The direction of improvement for companies with heavy fixed assets
from a practical perspective.
"I understand the structure. Now, how do I apply it to my own company?"
We will proceed to that design.
[Numera Flow "Turning numbers into management flow"]