4.1. Functional balance sheet

The functional balance sheet is no more than the rearrangement of the itens of a (“regular”) balance sheet.

The assets are divided between:

• Investment assets
• Operating assets
• Treasury assets

Equity+Liabilities are divided into:

• Permanent financing
• Operating liabilities
• Treasury liabilities

Investment assets

Investment assets are long-term assets, and as such correspond to the non-current assets. Using the items of the CASFLO APP’s balance sheet, these are the elements of the investment assets:

• Tangible assets
• Intangible assets
• Other noncurrent assets

Operational assets

Operational assets are all current assets of the balance sheet which a company needs to run its business. Using the items of the CASFLO APP’s balance sheet, these are the elements of the operational assets:

• Inventory
• Clients
• Government receivables
• Other current assets
• Cash and deposits

Be aware that other current assets and cash and deposits may be part of the Treasury assets (below). If any current asset would be not necessary for running the company, then it should quoted as treasury. The same applies to the concept of cash surplus (the amount of cash that the company does not need run), which should be considered as a treasury asset. CASFLO APP was designed in such a manner that every other current asset item or every cash and deposit items is considered needed for the company, hence it is an operational asset.

Treasury assets

The treasury assets (for the purpose of the functional balance sheet) are assets that have liquidity and that are not needed to run the company.

As stated above, CASFLO APP was designed in such a manner that every other current asset item or every cash and deposit items is considered needed for the company, hence it is an operational asset. Therefore there are no Treasury assets in CASFLO APP.

Permanent financing

Permanent financing is equal to the sum of Equity with non-current liabilities. Equity includes all items of the equity block of a balance sheet. Using the items of the CASFLO APP’s balance sheet:

• Issued capital
• Other equity instruments
• Reserves
• Retained earnings
• Other equity changes
• Net Income

The non-current liabilities within CASFLO APP’s balance sheet organization are:

• Debt
• Other noncurrent liabilities

Operational liabilities

Operational liabilities are all current liabilities of the balance sheet which a company needs to run its business. Using the items of the CASFLO APP’s balance sheet, these are the elements of the operational liabilities:

• Suppliers
• Shareholders
• Government payables
• Other payables
• Other current liabilities

In practice, the other current liabilities itens can instead be part of the treasury liabilities if these did not influence the running of the company. By design, CASFLO APP considers them as operational.

Treasury liabilities

The treasury liabilities are liabilities itens that are not needed to run the company. You can consider an other current liability as part of treasury liabilities if it is not necessary for the company.

Financing investment assets through permanent financing

Considering the liquidity and enforceability of each the account, it is advisable that the investment assets (long-term assets with less liquidity) should be financed through capital that is forecasted to stay in the company on the long run: the permanent financing. The permanent financing includes the equity and the noncurrent liabilities. As the name “permanent financing” signals that this is the company’s long-term financing and should be used to invest in productive capacity.

\(Permanent\ financing=Equity+Noncurrent\ liabilities\)

If the investment assets are higher than the permanent financing, it means that the company is financing its long-term assets with short-term resources. Although it may be feasible and sustainable it can impose risks to the management of the company if the company is not generating enough cash through its operations to be able to cover its debt service. If that occurs the management will have to keep renegotiating its financing, a situation that implies more uncertainty.

The opposite scenario, where permanent financing is larger than investment assets is also undesirable because long term financing usually implies a higher cost of financing.