The Virtual CFO

Cash Flow Statement - Cash Flows from Investing Activities

The cash flows from investing section of the cash flow statement show the cash flows from investing activities.

The typical categories reported in this section of the cash flow statement include cash inflows and outflows from:

• The principle from loans made to companies or people outside of your company.
• Investments in other companies (i.e., stocks, bonds, and other equity holdings).
• The purchase and sale of property, plant, and equipment (i.e., assets with a long life).

The Black Eyed Peas Learned the Hard Way that Taxes Are Their Responsibility

There was an article posted recently on the AccountingWeb site entitled “Black Eyed Peas in hot water for ten years of unfiled tax returns”. The article discusses how the band’s manager failed to file tax returns for approximately $10 million in income. The situation the band finds themselves in highlights two areas that you should be concerned with in your business.

The first is being involved with and having an understanding of every aspect of your business. I often have small business owners and entrepreneurs tell me that they don’t want to be concerned with non-production or non-sales matters such as accounting, taxes, etc. They want to either delegate or sub out the work. I usually retort by saying that you cannot afford to not be concerned with these areas of your business because: (1) it makes you a better business decision maker when you do and (2) if something goes wrong (such as unfiled tax returns) you will be held responsible.

As you can see in this article, the Black Eyed Peas are paying a price for supposed malfeasance of their manager. If they were more hands-on with their businesses, this may not have occurred.

There as a CMT special a few years ago about Gretchen Wilson where she discussed being advised early in her career to be actively involved in her career business decisions. As a result, she said she was in the middle of every business decision that affected her career and income. I would bet that Ms. Wilson understands her tax obligations and responsibilities better than any of the members of the Black Eyed Peas did.

The second issue is the type of tax professional you use. In an earlier blog series (I Have People (Who Are Paid $7.00 an Hour), Part 1), I discussed my experience with one of the tax preparation services, where the tax preparer compensation was a lot less than you would expect it to be (i.e., $7/hour). In normal business circumstances, $7 an hour doesn’t constitute professional compensation.

CPAs are required to have 80 hours of continuing professional education (CPE) every two years. The reason for this is that the boards of accountancy want to ensure that CPAs keep their knowledge base up to date with respects to accounting regulations and tax law. Obviously, CPAs who prepare taxes take a number of CPEs that involve the preparation of federal and state tax returns. Most CPAs who prepare taxes also subscribe to state and federal tax law periodicals and newsletters, which further enhance the CPAs understanding of tax law and obligations.

I hope that the Black Eyed Peas have hired a good tax CPA to help them with their business endeavors going forward.

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.