The Virtual CFO

Cash Flow Statement - Cash Flows from Operating Activities

The cash flows from operating activities section of the cash flow statement is probably the easiest for you to understand and relate to. This section reports the actual cash inflows and outflows of your company from your operations (cash flows from the accounts that are included on your income statement).

These accounts include sales revenue collected and expenses actually paid such as payroll, materials, supplies, taxes, and insurance. This section does not include accounts receivable (sales that customers haven’t paid for yet) or accounts payable (invoices you haven’t paid yet), because these transactions don’t affect the cash position of your business.

The most important thing you can learn from the cash flows from operating activities section of the cash flow statement is whether or not your company is generating enough cash from operations to pay the bills.

As I wrote in an earlier post, “Happiness is a Positive Cash Flow”. You can gauge your company’s happiness from the operating section of the cash flow statement.

The Cash Flow Statement

The cash flow statement reports your company’s cash receipts and payments during a certain period of time. This financial statement tells you where your company’s cash came from, what the cash was used for, and the change in your company’s cash balance.

There are three main sections of a cash flow statement:

1. Cash Flows from Operating Activities – cash inflows and outflows associated with your company’s operations (i.e., the revenues and expenses reported on the income statement).
2. Cash Flows from Investing Activities – cash activities from loans, investments, and property, plant, and equipment.
3. Cash Flows from Financing Activities – reports changes in cash position related to the owners’ equity.

Over the next few blog posts, I’ll discuss each of the three parts of the cash flow statement.

What The Virtual CFO is Thankful For

I am very thankful for my clients. In the last year, CPA for Small Business, LLC has experienced tremendous growth. I am very honored that you give me the opportunity to serve your accounting and financial management needs.

I'm thankful for the number of prospects I have met with in the last year. Even if you didn't choose me to be your CPA, I hope that I have been able to help you and your business with the discussions we've had.

I am very thankful for my wife Linda, who has been my number one fan and supporter the last three and a half years as I've built CPA for Small Business, LLC. Linda also offers excellent third party observations about my company, which is why I call her my external board of directors.

I am thankful for my daughter a Hannah, who is able to entertain herself while I work and meet with clients. It's cool to have such a good kid as a daughter.

Like you, I have my share of frustrations running and building an entrepreneurial company. But my blessings far outweigh the problems I have.

And finally, I am grateful that you, the readers of The Virtual CFO Blog. Without you, this blog wouldn't exist. Thanks!

Thank You to All the Veterans Who Served

I would like to thank all the veterans for their service to our country. We are able to live free in the United States of America because of your sacrifice.

Last year, the sacrifice veterans make really hit home with me. In late October 2008, I received an email from a prospect who was in Afghanistan with the 101 Airborne. He contacted me for business plan and financial advice for a business venture he was planning when he was honorably discharged in early 2009. We exchanged a few emails and then arranged a teleconference in mid-November. When the teleconference time came, the prospect didn’t call.

The next day, I was standing in line with my daughter for Thanksgiving lunch at her school when my cell phone rang. It was this prospect. He apologized for not calling the day before. He went on to tell me that there was an “incident” at the base he was stationed at in Afghanistan and that all communications, including internet and cell phones, were cut off during the incident. There was no way for him to communicate with me during the incident.

This situation let me see first-hand that our soldiers are in harm’s way. I understand that their sacrifice is the reason I can have the life I do with my family.

So I would like to thank my client Nick, and every other veteran, for their service to our country. I really do appreciate it.

Balance Sheet – Owners Equity

The Owner’s Equity (sometimes called Shareholder’s Equity) represents the assets of the company that the owners and/or shareholders own. You calculate the owner’s equity by subtracting your company’s total liabilities from all of the assets (i.e., total assets – total liabilities = owner’s equity).

The owner’s equity section of the balance sheet for small business generally includes:

• Capital Stock - the cash and assets you contributed to start your business.
• Retained Earnings - earnings that have not been distributed to the owners.

(Note: S Corporations, partnerships, and LLCs do not normally have retained earnings; rather they have what is called “basis”, which is each owners/partners share of the company’s assets)

Balance Sheet – Long-Term Liabilities

The long-term liabilities section of the balance sheet shows the obligations your company has that will take longer than a year to pay. As I stated in my previous post, the short-term portion (due in less than a year) of long-term payables are reported in the current liabilities section of the balance sheet.

Some of the most commonly used categories of long-term liabilities include:

• Notes Payable – obligations to pay for equipment, land, buildings, etc.
• Deferred Income Tax – taxes you owe, but are legally ably to defer into future years.
• Lease Obligations – capital leases (put simply, a lease that resembles a purchase) are required to be reported as long-term liabilities.

Balance Sheet – Current Liabilities

The current liabilities section of the balance sheet shows the obligations that your business will be paying in a year or less. As with the current assets section of the balance sheet, the current liability categories are listed in order of liquidity.

Below is a list of the typical liability categories, in order of liquidity:

• Accounts Payable – invoices your company incurs for day-to-day operational and general and administrative expenses.
• Current Income Tax Liabilities – payroll taxes and taxes due for the owners of your company.
• Short-Term Part of Loans and Notes Payable – in financial statements, loans are divided into two categories: (1) short-term balance due (due in next year), and (2) long-term balance due (balance due in more than a year).
• Other Current Liabilities – these are other obligations your company has, that are due in less than a year, that do not fit into the other short-term liability categories.

Balance Sheet – Long-Term Assets

Long-term assets, sometimes called long-term investments, are assets that you plan to hold for a year or more.

Long-term assets are generally broken down into 4 categories:

1. Securities – include stocks, bonds, and long-term notes receivable.
2. Fixed Assets Not Currently Used in Operations – such as land acquired but not being used.
3. Special Funds – pension funds, funds for future expansion, and the cash surrender value of life insurance.
4. Nonconsolidated Subsidiaries and Affiliated Companies - accounting rules say that closely related companies must consolidate their financial statements into one set of statements. This category of long-term assets is for affiliate and subsidiary companies that are not considered closely held.

Current Asset Section of the Balance Sheet

The current assets section of the balance sheet reports the assets your company has that will be converted into cash in a year. On the balance sheet, the current assets are generally listed in order of liquidity, which is how quickly the assets will be converted into cash.

Below is a list of the common categories found in the current asset section of the balance sheet (listed in the normal order of liquidity):

• Cash – listed at its current balance on the date of the balance sheet. This includes your company’s savings and checking accounts.
• Short-Term Investments – listed at their fair value, which is the price you could sell the investment for now. This would include certificate of deposits and other similar short-term investments that are close to their maturity date.
• Accounts Receivable – reported at the amount you think you will actually collect from your total receivables. The accounts receivable balance is often reported showing total receivables less estimated bad debt.
• Inventories – presented in the basis you value your inventory, such as Costs, First In First Out (FIFO) or Last in First Out (LIFO).
• Prepaid Items – are expenditures you have already made for costs or services, such as insurance or equipment rent, that are paid in advance.

Overview of the Balance Sheet – What is My Company’s Financial Position Right Now

The balance sheet shows the financial position of your company on a specific date. Balance sheets are usually dated at the end of the month, such as September 30, 2009.

The balance sheet is composed of three sections:

1. Assets – include current assets (cash or other assets that will be converted into cash in a year or less), long-term assets (assets that will be held for a year or more), and property, plant, and equipment (durable assets used in the operations of the business).
2. Liabilities – include current liabilities (obligations that will be paid with assets in a year or less) and long-term liabilities (obligations that will take longer than a year to repay).
3. Owners Equity - includes capital stock (the cash and assets you contributed to start your business) and retained earnings (profit that has not been distributed to the owners).

Over the next few days, I will explain in more detail the three sections of the balance sheet.