The 12-Week MBA Chapter 5: The Balance Sheet Part 2 - Reading Between the Lines
Your food truck is doing great. Cash is piling up, debt is going down, and customers love your grilled cheese. Time to expand. But expansion changes everything on the balance sheet, and not always in ways that feel comfortable. This is post 7 in my 12-Week MBA retelling series.
Growth Means New Risks
In Part 1, we built a balance sheet from scratch using a food truck example. By the end of Year 1, the business was solid. Now the authors introduce a growth opportunity.
A local tech startup called Newage wants your food truck to set up a kiosk on its office campus. Newage will pay for all employee meals at higher prices. Sounds amazing, right? But there is a catch: Newage wants to be billed once a month and then pay thirty days after that.
So you will cook the food, serve it, and then wait up to sixty days to actually see the cash. Meanwhile, you need to spend $40,000 on setting up the kiosk and double your inventory because you are now feeding two locations.
After setting up the kiosk but before the first day of sales, the balance sheet looks scarier. Cash dropped from $65,000 to $25,000 because you bought equipment. Inventory doubled. Accounts payable doubled too because your supplier gave you more food on credit. The total balance sheet grew, but the cash cushion shrank.
This is a real pattern you see in businesses all the time. Growth eats cash. Even when the opportunity is good, you have to spend money before you make money.
Enter: Accounts Receivable
The kiosk’s first month is a hit. The truck sells $20,000 in sandwiches as usual, and the new kiosk brings in $25,000. Total sales: $45,000. Expenses doubled to match the bigger operation, but profit for the month is a solid $25,000.
Here is the new wrinkle. The truck customers paid cash. But Newage, the corporate client, just got a bill. They have not paid yet. That $25,000 they owe you is not cash. It is a promise. On the balance sheet, it shows up as accounts receivable – money someone owes you that you expect to collect.
Accounts receivable is an asset, but it is not cash. This is one of the most important things to understand about balance sheets. A company can look profitable on paper but still have no actual money in the bank because its customers have not paid yet.
Now think about what happens if Newage has financial trouble and cannot pay. That $25,000 evaporates. Your inventory might spoil. Suddenly you have only $15,000 in cash to cover $32,500 in liabilities. Everyone starts sweating.
Current vs Noncurrent: The Time Factor
The authors introduce a really useful concept here: not all promises are equally urgent.
Some bills are due soon. Some are due years from now. A balance sheet that just lumps everything together does not tell you much about the actual pressure a company is under. So balance sheets split things up:
Current assets are things you expect to turn into cash within twelve months:
- Cash (already liquid)
- Accounts receivable (customers should pay soon)
- Inventory (you plan to sell it)
Noncurrent assets are things you plan to keep for more than a year:
- Equipment, buildings, trucks
- Long-term investments
Current liabilities are promises due within twelve months:
- Accounts payable (supplier bills)
- The portion of your loan due this year (short-term debt)
Noncurrent liabilities are promises due further out:
- The rest of your long-term loan
- Multi-year contracts
This split matters a lot. In the food truck example, even if the economy tanks and Newage does not pay, the company has $15,000 in cash to cover $12,500 in current liabilities (accounts payable plus this year’s loan payment). The remaining $20,000 of debt is not due for years. The company can survive the short-term storm.
Without this current/noncurrent split, it would look like the company cannot cover its debts. With the split, you see that timing is on the company’s side.
AT&T: A Real-World Balance Sheet
The authors bring back AT&T to show how these same concepts work at massive scale. AT&T’s 2021 balance sheet has total assets of about $552 billion. On the other side: about $368 billion in liabilities and $184 billion in equity.
That means for every $1 of equity, there is about $2 of liabilities. Sounds terrifying, right? But the authors ask us to flip the question: instead of asking “why does AT&T have so much debt?” ask “why are lenders so eager to give AT&T money?”
Three reasons stand out:
Millions of customers. AT&T does not depend on a few big clients. It has tens of millions of subscribers. Some might leave, some might not pay their bills this month, but it is nearly impossible for a huge chunk to disappear at once. Telecom is a basic need. People cut vacation budgets before they cut their phone plans.
Subscription contracts. Most customers are locked into monthly contracts that auto-renew. Some are even locked in for two years. This gives AT&T incredible visibility into future cash. They know, with reasonable confidence, how much money will come in next month and next year. Compare that to a car company that has no idea when you will buy your next vehicle.
Valuable physical assets. AT&T owns cell towers, cables stretched across North America, real estate, and wireless spectrum licenses that other companies would love to have. If things go wrong, creditors can seize assets that are genuinely useful and sellable. This is very different from, say, a software startup where the main asset is code that might be worthless to anyone else.
The authors make a point that stuck with me: AT&T’s debt is not a sign of weakness. It is a symptom of strength. Creditors look at AT&T and see steady, frequent, predictable cash from a massive customer base secured by physical assets that hold their value. They are happy to lend at low interest rates.
The Subscription Model Insight
The book takes a small detour here that I think is brilliant. It explains why so many companies are moving to subscription models. Amazon Prime, Microsoft Office 365, Netflix, your gym membership – they all want you paying a regular monthly fee instead of making one-off purchases.
From a balance sheet perspective, subscriptions make incoming cash flows smooth and predictable. Investors love predictability. Lenders love predictability. When your revenue is steady month to month, you can take on more debt at better rates, which lets you grow faster.
This is why every software company switched from “buy the CD for $200” to “pay $10 a month forever.” It is not just about making more money over time (though it is that too). It is about making the balance sheet look better to everyone who reads it.
The Balance Sheet as a Map
The authors end this chapter with an analogy I really liked. They compare a balance sheet to knowing your position on a mountain. If you know exactly where you are, you can figure out where you can go next, what it will cost to get there, and what dangers to watch for.
The balance sheet works the same way. It does not tell you the future. But it tells you your current position: what resources you have, what promises you have made, and how urgent those promises are. From that position, you can evaluate what opportunities are realistic and what threats are most dangerous.
A company with lots of cash and little debt has freedom to take risks. A company with thin cash and heavy short-term liabilities is on a tightrope. Neither situation is automatically good or bad. It depends on the context, the industry, and the business model.
The Chapter’s Key Takeaways
The balance sheet is a record of past transactions. It shows what a company controls (assets) and what it owes (liabilities and equity).
The accounting identity – assets equals liabilities plus equity – is always true. If it does not balance, someone made an error.
Current and noncurrent categories add a time dimension. They tell you how urgent the promises are and how quickly assets can be turned into cash.
The equity number on a balance sheet is not the same thing as what shareholders think the company is worth. Shareholder value depends on future expectations, not just what is recorded in the books.
As a statement of financial position, the balance sheet helps you understand what threats and opportunities the company is likely to face next.
My Take
For years, I looked at balance sheets and thought they were just boring tables of numbers. This chapter changed that for me. The food truck example makes it so clear. Every decision a manager makes – buying equipment, hiring people, extending credit to a customer, taking on debt – changes the balance sheet. And every change affects how different stakeholders feel about the company’s future.
The biggest insight for me was the AT&T example. I always assumed more debt equals more risk. But after reading this chapter, I see that the type of business matters more than the amount of debt. A company with predictable cash flows and valuable assets can carry huge amounts of debt comfortably. A company with volatile revenue and no hard assets might struggle with even a small loan.
If you take one thing from this chapter: a balance sheet is not a report card. It is a map of where you stand right now and a hint about where you might go next.
Book: The 12-Week MBA by Nathan Kracklauer & Bjorn Billhardt | ISBN: 978-0-306-83236-9
Previous: Chapter 5 - The Balance Sheet Part 1
Next up: Chapter 6 - Cash Flow Basics - Why profit and cash are not the same thing.
Part of the 12-Week MBA retelling series