The balance sheet may be reorganized according to the accounts type instead of nature.
The assets side may be divided into investment assets, operating assets and asset treasury. The liabilities comprise permanent financing, operating liabilities and passive treasury.
Keeping in mind the notion of liquidity and enforceability of each the accounts it is advisable that long-term asset (less liquid) should be financed through capital that is forecasted to stay in the company on the long run, thus corresponding to permanent financing, which includes the equity and noncurrent liabilities. As the name indicates this is the company’s long-term financing and should be used to invest the productive capacity of the company.
- \(Permanent\ financing=Equity+Noncurrent\ liabilities\)
Equity includes all items of the equity block of a balance sheet. Using the items of the CASFLO APP’s balance sheet:
The non-current liabilities within CASFLO APP’s balance sheet organization are:
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.