Start Your Own Business (104 page)

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Current assets.
These are the assets in a business that can be converted to cash in one year or less. They include cash, stocks and other liquid investments, accounts receivable, inventory and prepaid expenses. For a clothing manufacturer, the inventory would include raw materials (yarn, thread, etc.), work-in-progress (started but not finished), and finished goods (shirts and pants ready to sell to customers). Accounts receivable represents the amount of money owed to the business by customers who have purchased on credit.

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Fixed assets.
These are the tangible assets of a business that will not be converted to cash within a year during the normal course of operation. Fixed assets are for long-term use and include land, buildings, leasehold improvements, equipment, machinery and vehicles.

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Intangible assets.
These are assets that you cannot touch or see but that have value. Intangible assets include franchise rights, goodwill, noncompete agreements, patents and many other items.

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Other assets.
There are many assets that can be classified as other assets, and most business balance sheets have an “other assets” category as a catchall. Some of the most common other assets include cash value of life insurance, long-term investment property and compensation due from employees.

“Great companies are
built by people who
never stop thinking
about ways to improve
the business.”

—J. WILLARD MARRIOTT,
FOUNDER OF MARRIOTT
INTERNATIONAL INC.

 

 

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Current liabilities.
These are the obligations of the business that are due within one year. Current liabilities include notes payable on lines of credit or other short-term loans, current maturities of long-term debt, accounts payable to trade creditors, accrued expenses and taxes (an accrual is an expense such as the payroll that is due to employees for hours worked but has not been paid), and amounts due to stockholders.

Balance Sheet

 

ABC Clothing Inc.

 

 

Year 1	Year 2
Assets:
Current Assets:
Cash	$10,000	$20,000
Accounts Receivable	82,000	144,000
Inventory	185,000	230,000
Prepaid Expenses	5,000	5,000
Total Current Assets	282,000	399,000
Fixed Assets:
Land	0	0
Buildings	0	0
Equipment	150,000	120,000
Accumulated Depreciation	-30,000	-30,000
Total Fixed Assets	120,000	90,000
Intangible Assets	0	0
Other Assets	10,000	11,000
Total Assets	$532,000	$590,000

 

 

 

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Long-term liabilities.
These are the obligations of the business that are not due for at least one year. Long-term liabilities typically consist of all bank debt or stockholder loans payable outside of the following 12-month period.

Balance Sheet

 

ABC Clothing Inc.

 

 

Year 1	Year 2
Liabilities & Equity:
Current Liabilities:
Notes Payable—Short Term	60,000	42,400
Current Maturities of Long-Term Debt	30,000	30,000
Accounts Payable	82,000	86,000
Accrued Expenses	7,900	13,500
Taxes Payable	0	0
Stockholder Loans	0	0
Total Current Liabilities	179,900	171,900
Long-Term Liabilities	120,000	90,000
Total Liabilities	$299,900	$261,900
Owner’s Equity:
Common Stock	75,000	75,000
Paid-in-capital	0	0
Retained Earnings	37,100	163,100
Total Owner’s Equity	112,100	238,100
Total Liabilities & Equity	$412,000	$500,000

 

 

 

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Owner’s equity.
This figure represents the total amount invested by the stockholders plus the accumulated profit of the business. Components include common stock, paid-in-capital (amounts invested not involving a stock purchase) and retained earnings (cumulative earnings since inception of the business less dividends paid to stockholders).

1.
Net cash flow from operating activities
. Operating activities are the daily internal activities of a business that either require cash or generate it. They include cash collections from customers; cash paid to suppliers and employees; cash paid for operating expenses, interest and taxes; and cash revenue from interest dividends.

2.
Net cash flow from investing activities
. Investing activities are discretionary investments made by management. These primarily consist of the purchase (or sale) of equipment.

3.
Net cash flow from financing activities
. Financing activities are those external sources and uses of cash that affect cash flow. These include sales of common stock, changes in short- or long-term loans and dividends paid.

4.
Net change in cash and marketable securities
. The results of the first three calculations are used to determine the total change in cash and marketable securities caused by fluctuations in operating, investing and financing cash flow. This number is then checked against the change in cash reflected on the balance sheet from period to period to verify that the calculation has been done correctly.

Cash-Flow Statement

 

ABC Clothing Inc.

 

 

Year 1	Year 2
Net Cash Flow From Operating Activities:
Cash received from customers	$918,000	$1,438,000
Interest received	3,000	5,000
Cash paid to suppliers for inventory	(853,000)	(1,091,000)
Cash paid to employees	(80,000)	(120,000)
Cash paid for other operating expenses	(69,300)	(104,400)
Interest paid	(17,800)	(15,000)
Taxes paid	(15,900)	(54,000)
Net cash provided (used) by
operating activities	($115,000)	$58,600

 

 

 

 

Year 1	Year 2
Net Cash Flow From Investing Activities:
Additions to property, plant and equipment	(150,000)	0
Increase/decrease in other assets	(10,000)	(1,000)
Other investing activities	0	0
Net cash provided (used) by investing activities	($160,000)	($1,000)
Net Cash Flow From Financing Activities:
Sales of common stock	75,000	0
Increase (decrease) in short-term loans (includes current maturities of long-term debt)	90,000	(17,600)
Additions to long-term loans	120,000	0
Reductions of long-term loans	0	(30,000)
Dividends paid	0	0
Net cash provided (used) by financing activities	$285,000	($47,600)
Net Increase (Decrease) In Cash	$10,000	$10,000