Why were LEXUS sales so strong even during the COVID-19 pandemic? A CPA explains the reason!

In this article, I will explain why Toyota and Lexus have been performing so well, and the major problem lurking behind this. This is actually a very significant issue for small and medium-sized business owners, and it may not be someone else's problem, so please read this column to the end.

COVID-19 loans are related to Toyota's record-high profits

First, let me explain the actual situation Toyota was in.

Toyota Motor Corporation's consolidated financial results for the fiscal year ended March 31, 2022 (April 1, 2021 to March 31, 2022) showed an increase in both revenue and profit, with operating revenue of 31.3795 trillion yen and operating profit of 2.9956 trillion yen. Even going back to before the COVID-19 pandemic, these were the highest operating revenue and operating profit ever recorded.

Given the situation—fewer outings due to the pandemic, the trend of young people moving away from car ownership, the emergence of electric vehicles that consider environmental issues, and autonomous driving becoming a reality—I think many of you might feel that things are "not very good" and that "the future will be tough."

However, in reality, Toyota achieved record-high profits in 2022. What do you think when you see this?

You might only think, "Huh, why?" or "Maybe it's because of the weak yen." While the weak yen certainly has an impact, domestic demand is also very strong. In particular, Lexus and other brands are growing significantly. One of the reasons for this domestic demand is the background of business owners buying luxury cars like Lexus and Mercedes-Benz with company funds.

They are borrowing money they don't even have a purpose for—taking advantage of COVID-19 loans that don't require interest or repayment for the time being—and using it to buy luxury cars they wouldn't normally purchase. There is also the intention to reduce taxes, as buying a luxury car as a tax measure allows for a certain amount of depreciation.

If a president understands the numbers, they would absolutely never do this kind of luxury car purchase. Instead, if you pay taxes, money remains. There is no need to spend money wastefully.

However, the reality is that the COVID-19 loans implemented by the government have been wasted due to a lack of knowledge on the part of business owners, and the funds have not reached the areas where they should have been used, such as supporting small and medium-sized enterprises.

"Paying taxes = a bad thing"?

I previously explained the "BS" (Balance Sheet), but let's review it once more. The left side is the assets section, and the right side is the liabilities and net assets sections.

Debt must be repaid eventually. Even if you borrowed more money than necessary, if the company says, "We have no use for it, so we're just keeping it as cash on hand because it's risky," I think the company can function if this is used for repayment.

However, what form has the money that came in from COVID-19 loans been replaced with? It has been replaced with luxury cars. If you have replaced it with a luxury car, how will you repay the debt?

As I mentioned before, is it a good thing or a bad thing to live it up on borrowed money? If you think about it in terms of a household, for example, if you heard that "a wife borrowed money from a consumer finance company and bought a 5-million-yen facial beauty device," wouldn't you have a negative opinion about it?

It would be fine if you were profitable and had money to spare, but it is not something to do with borrowed money. The same applies to company funds. Why are you wasting money on debt? That is the point.

I will explain the "PL" (Profit and Loss Statement) once more. If you simplify the PL, there is revenue, and expenses are deducted. The difference that remains is the final profit. For example, suppose revenue is 100 and it is taxed at 30%. If 30% is taxed, 70% of the revenue remains. This 70% accumulates as the final profit remaining after paying taxes, which is equity, and can also be used for debt repayment.

However, in common social perception, paying taxes is often perceived as a bad thing.

Is there any benefit to reducing cash? I understand that you don't want to pay taxes because there is no return and it feels like a waste. However, there is no benefit whatsoever to reducing taxes. It just means even less money remains.

If you have 100 in revenue, pay 30% in taxes, and 70% remains as final profit. If you go to a cabaret club and spend that 100 in revenue, the tax is 0%, but the remaining money also becomes 0 yen. You end up in a situation where you cannot repay your debt because not a single yen of final profit (equity) has come in.

It is quite a frightening thing, yet for some reason, many companies work hard to reduce their taxes. They engage in exchanges like, 'We managed to implement measures in time again this year' or 'We somehow managed to get the tax down to zero.'

The important thing is not 'not paying taxes,' but 'generating profit'

However, isn't the important thing the amount of money remaining, rather than the tax amount? You cannot simply compare tax amounts of 10 million yen and 100 million yen.

If you pay 100 million yen in taxes, you should likely have about 200 million yen left as profit, meaning your cash increases by 200 million yen. Even if the tax amount is high, isn't that better?

If your taxes are zero every single year, your equity will never increase, and you will remain in a state of being full of liabilities, or what is known as debt. If you do not accumulate profit while remaining in a state where equity is only 5% and liabilities are 95%, you will be in debt for the rest of your life.

Since liabilities are money that will eventually leave the company, 95% of the assets the company holds is money that must eventually be paid out. In that state, there is no way your cash flow will be easy.

Why don't they generate profit? If you don't accumulate profit, you won't save money, so are they staying poor just to avoid paying taxes? Which of the two choices does the president want: 'to be someone who doesn't pay taxes' or 'to be rich'?

I think it is better to have money. Even if you pay a lot in taxes, if you have a lot of money left on hand, you will be able to do things you want to do, such as enjoying life or making business investments. By having a lot of money, you can also save more people. Isn't that better?

Strengthen the company, and then indulge in luxury

If you are not making a profit, you cannot save anyone, nor can you contribute to society. Japanese companies tend to be weak in aspects like social contribution, but nowadays, quite a few young people are looking very closely at these areas.

Recently, initiatives for the SDGs have become widespread. Young people are paying attention to these areas, and when they think about which company to buy products from, they look at things like whether the company is 'environmentally conscious.'

If you want to do that, you won't be able to respond unless you earn money. You need money to survive. This is no time for tax avoidance or being poor.

I have no complaints about you indulging in luxury with the surplus money you earned from making a lot of profit, or increasing your executive compensation to boost your own wealth. Executive compensation is included as an expense. If you are generating enough profit that you still have money left over for the company even after paying this, then it is fine to increase executive compensation.

However, there are many companies with low equity ratios that are full of debt, or companies that would go bankrupt if new loans were stopped. It is insane to take on debt and spend wastefully while in such a state.

If you want to indulge in luxury, do it after strengthening the company. But you shouldn't do it with debt, is what I'm saying. I think it would be good to properly review whether the company is actually okay.