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MENTORING - FUNDAMENTALS - Balance Sheet analysis 2 - Coggle Diagram
MENTORING - FUNDAMENTALS - Balance Sheet analysis 2
A company has two types of capital classifications. They are: (a) long-term capital; (b) short-term capital.
Long-term capital is called capital expenditure. Short-capital capital is called working capital.
Long-term capital is important for growth, that is for a company to
thrive
.
Short-term capital is important for survival. So for a company surviving is more important than
thriving
.
Good companies have a tab on working capital all the time. They never ignore it.
The next classification of capital is: (a) equity, inside capital; (b) debt (interest bearing) or liabilities (non-interest bearing)
What is the source of capital for capital expenditure and working capital.
Working capital generates cash (if done right) or consumes cash.(if done wrong).
Capital expenditure always consumes cash.
Equity comprises the initial paid-up capital and reserves acquired through profits.
Debt comprises bank borrowings. This is the major source of capital for capital expenditure and working capital. Some companies use debt very judiciously. These are great companies as they know how to use the financial leverage. Using debt is called financial leverage.
There is further classification of a balance sheet: (a) current assets; (b) current liabilities; (c) non-current assets; (d) non-current liabilities.
The above classification is what we can see on a balance sheet. The other classifications are for our better understanding.
Assets are classified into current assets and non-current assets. Current assets are those that are used or consumed within a financial year. Non-current assets are those that are consumed or used beyond a financial year.
Liabilities are also classified into current liabilities and non-current liabilities. Current liabilities are used within the financial year. Non-current liabilities are used beyond the financial year.
Current assets and current liabilities are also called short-term assets and liabilities.
Non-current assets and non-current liabilities are also called long-term assets and liabilities.
Assets = Equity + Liabilities
A balance sheet comes every six months. Once in September and second in March.