Business Articles, Corporate Finance, Finance Articles, Investing, Securities

Corporate Secured & Unsecured Debt Securities

Lending Money to Corporations using Corporate Secured and Unsecured Debt Securities could be a risky opportunity for Institutional Lenders and for the Banks and Private Credit Investors. If your not up to date on the legal hierarchy or priority of claims for repayment? Allow me to share that Priority list below. Familiarity with a Corporate Balance Sheet will likely make this list easy for you.

Liquidation/bankruptcy fees and charges – this does not include court fees.
Debts due to preferential creditors – those entitled to certain payments in priority over other unsecured creditors – including wages owed in the four months before the date of the insolvency order, as well as all holiday pay and contributions to occupational pension schemes.
In company cases, any creditor holding a floating charge over an asset, such as a debenture. This is where a class of goods or assets – eg the debtor’s stock – are named as security for a debt.
All unsecured creditors.
Any interest payable on debts.
The shareholders in company cases.

The hierarchy of Credit starts with Secured Creditors then Unsecured Creditors. However for this Post I would like to focus on deliberately on Secured and Unsecured Debt for Institutional Investing. This small list is meant to be used in order and will help Retail Investors, Students, and Business Executives who need to brush up on this topic of interest. As a value investor we are laser focused at looking on a Companies Balance Sheet and focus directly and early on a Companies Solvency. If the company is Debt heavy? This usually indicates we need to consider the use of the Debt in order to make a informed decision on “How we arrive at a Companies Valuation”. If the Company we are investigating has no Debt on the Books? This is a good sign. And tells us as Value Investors “This maybe a very profitable Business to investigate further.”

Secured Debt

Corporate Debt Securities are like any other Loan, and are backed by various types of assets of the issuing Corporation. This list is a Seniority list. Meaning they are Secured Debt options in order.

Mortgage Bonds

Just as a Individual would go to the Bank to ask for a Loan backed by the Home and Land as Collateral for the Mortgage, a corporation will borrow money backed by Real Estate and Physical Assets that belong to the Corporation. If the Corporation fails and is unable to repay the Long Term Debt Obligation “Mortgage Bondholders”. The Assets pledged are liquidated by Court Order when the Corporation is insolvent and goes through the Chapter 7 Bankruptcy process. For further explanation? This video should help.

Equipment Trust Certificates

Interestingly Railroads and Airline companies, finance the acquisitions of their Rolling Stock, Train Rail Cars, Airplanes, by issuing an Equipment Trust Certificate. The Company provides a Down payment of usually 20% Twenty Percent of the cost of the rolling stock, and finances the balance over the course of time. For example, 20 years time. Because equipment has wear and tear from daily use in the operations of the Business, the Railroad will pay off a portion of the loan on an annual basis. Interestingly at no time, theoretically, is the value of the assets (rolling stock, rail-cars,Jet Aircraft) worth less than the amount of the principal remaining on the loan. When the company finishes paying off the loan it receives a clear title for the equipment pledged from the Trustee. If a company does fail to make the payments for the loan? The lender can then repossess the collateral and sells it for his benefit. It’s the same concept of financing a new Car.

Did you catch my post here on: Pooled Investments What you need to know?

Collateral Trust Bonds

Sometimes a Corporation doesn’t have real estate, Equipment, or assets to pledge as collateral for a Mortgage or Loan. Instead the Board of Directors or Management can pledge Company Securities like Stock or other Negotiable Securities from a Parent Corporation into a Trust as a form of secured collateral. This is useful because the Securities are readily liquidated in case of default. Obviously the better quality of Securities deposited as collateral the better the Rating of the Bond. Sometimes these are also referred to as Collateral Trust Certificates.

Unsecured Debt Securities

Debentures

A Debenture is a Debt Obligation of a Corporation backed by only the Corporations word and general creditworthiness. Debentures are written promises of the corporation to pay the principal loan amount back its due date with interest on a regular basis.Debentures surprisingly are not secured by any pledge of property. They are considered safe when the Lender has trust or a credit relationship with the Corporation. This is sort of like a Revolving line of Credit for Commercial Banks and their clients who are the Corporations. Example: Similar to Consumers who use a Bank Credit Card and have great credit worthiness.

Guaranteed Bonds

A Guaranteed Bond is a Bond that is guaranteed as to payment of interest, or both principal and interest, by a corporate entity other than the issuer. The guarantee is only as good and valued if the company providing the guarantee has a strong business. Guaranteed Bonds were popular in the Railroad industry in which Major Railroad Companies sought to ease the trackage rights from a short line Rail lines, and would guarantee the smaller Rail Lines companies debt. A more recent example would be Exxon Mobile Corporation guaranteeing a subordinate companies debt issue.

Senior Debt

This is used to describe the seniority of a Debt Issue. Or the relative priority of repayment claim of a Debt that has been issued. Every preferred stock has a Senior claim to Common Stock. Every Debt security has a senior claim to preferred stock. Secured Bonds have a senior claim to unsecured debt.The term senior securities means bonds and preferred stock, because they have a claim senior to common stock. If you would like to see the Seniority of Debt and Equity? Please refer to the Chart Above below the opening paragraph.

Subordinated Debt

Subordinated Debt is just that! “Belonging to a lower class or rank.” Please refer to above list of Ranked Repayment Obligations.

Credit Ratings

It would be unprofessional of me not to include Ratings and Credit Ratings Agencies in this Post. When evaluationg a Bonds Ratings? You should refer to the Bond Ratings are defined by the Creditworthiness of a Companies Debt. These are issued by Standard & Poors and Moody’s and Jefferies Investment Bank. All these are fantastic Companies who hand Credit Worthiness of Debt Issues and Companies Debt History.

For Credit Ratings This Image Below Will show my Notes on Bond Ratings.

High-Yield Bonds

Since I would have a difficult time explaining in detail High-Yeild Bonds. Investopedia has shared and described High-Yield Bonds as?

High-yield bonds (also called junk bonds) are bonds that pay higher interest rates because they have lower credit ratings than investment-grade bonds. High-yield bonds are more likely to default, so they pay a higher yield than investment-grade bonds to compensate investors.1

Issuers of high-yield debt tend to be startup companies or capital-intensive firms with high debt ratios. However, some high-yield bonds are fallen angels, which are bonds that lost their good credit ratings.

In conclusion I hope you learned a few things about Corporate Secured and Unsecured Debt Securities. In the end Bond Investing can fail. So it’s vital to know the basics of Bonds and Credit. This Wall Street Journal Animated Video should help you understand this fact.

These are basics we use as Investing and Finance professionals. Feel free to share and if you learned something? Fantastic! “

This post is for Educational purposes only. And should not be construed, implied, or taken as Investment Advice.”

Godspeed! Thank You.

Business Articles, Corporate Finance, Finance Articles, Hedge Fund Articles, Value Investing

How to Calculate a Stocks Intrinsic Value

Just like with any profession there are professionally instructed leaders of industry and amateurs. That is the same for Investing. But you should know that if you are not read up on the latest value investing procedures or if you haven’t formed your own personal checklist before investing in a Company or stock? You likely are make big mistakes along the way. But with today’s post on “How to Calculate a Stock or Company’s Intrinsic Value?” This will begin giving you a foundation or basic education to thrive and become successful in Investing.

I see so many people who do let emotions control their investing strategies and future. They are bound to lose almost everything. It’s just like If your a player in the Stock Market using only your gut and other people’s money? Your a borderline Criminal, Moron and most likely a gambling Day Trader at best. And should be taken behind the Building strung up by your ankles smothered with cheap grape jelly packets from the cafeteria and left for the Bears. These day’s Quants run the show. But there is good news! This post is for the bonafide new up and coming Investors wanting to reach that next elite level in Investing. If you have ever wondered where the like’s of Warren Buffet, Seth Klarman, Howard Marks, and other Value Investing Legends get there super secret knowledge from? This post is definitely going to provide you with a foundation of how to Calculate Intrinsic Value of a Stock or Discounted Cash Flow (DCF) of a Business.

So stay tuned…This is a post you do not want to miss. Even if it is Mathematics and heavy Calculations.

Hedge Fund Managers

If you plan on opening your own Hedge Fund Shop in the future or if your a Everyday Sophisticated Investor that plans on using Calculations and Mathematics instead of Gambling and Speculating? Your going to want to lay a foundation around Value Investing using Benjamin Graham’s teachings and procedures. So it’s absolutely vital you read Benjamin Grahams “Intelligent Investor” Book. Question. What makes a Hedge Fund unique to calculating a Stock or Companies Intrinsic value or Discounted Cash Flow? Well for starters Hedge Funds typically focus on trading on the stock market. But before I begin explaining Hedge Funds in depth like so many Financial personalities around me “I have extreme ADD sometimes.” LOL So maybe I should keep on track.

What is Intrinsic Value?

The intrinsic value of something is said to be the value that that thing has “in itself,” or “for its own sake,” or “as such,” or “in its own right.” Extrinsic value is value that is not intrinsic. Many philosophers take intrinsic value to be crucial to a variety of moral judgments. STANFORD BUSINESS ENCYCLOPEDIA

If your going to understand Intrinsic Value of a Business or Stock you need to understand that the Market is just voting for the day what they price is of a Stock. It doesn’t actually value the company. We use Intrinsic Value to evaluate and make a opinion to analyse if the Company or Stock we are looking at is undervalued and a bargain. If it is not a bargain and not undervalued? Then we keep looking. What is the formula to calculate Intrinsic Value? Before I answer this basic question you must know I highly recommend you read Benjamin Graham’s “Intelligent Investor” Book. It’s Warren Buffett’s bible of sorts. But first we need to lay out to terms.

Intrinsic Value Formula and Margin of Safety. These Topics are incredibly important for making a educated and professional judgement on a company’s future. And knowing if it is worth investing in.

By the way did you miss Berkshire Hathaway’s 2022 Annual Meeting? WATCH & READ HERE!

How to Calculate Intrinsic Value of a Business?

#1 – Intrinsic Value Formula of a Business

Mathematically, the intrinsic value formula of a business can be represented as,

where FCFE_i = Free cash flow to equity in the i^th year
FCFE_i= Net income _i + Depreciation & Amortisation _i – Increase in Working Capital _i – Increase in Capital Expenditure _i – Debt Repayment on existing debt _i+ Fresh Debt raised _i
r = Discount rate
n = Last projected year

Since this formula is mathematically difficult for ADD individuals like myself who struggle with on the page formulas. I would like to make this as easy as I am able for you. Here are a few videos that go in depth. Watch the Videos below to explain the calculation and models in action. This will begin giving you a foundation to grow.

BENJAMIN GRAHAM’S INTRINSIC VALUE CALCULATION MODEL EXPLAINED

Watch this Video below for a in depth explanation by this legendary Value Investor who is Charlie Mungers Bridge Playing Side Kick Mr. Mohnish Pabrai. Mr. Mohnish Pabrai is sincerely a fantastic guy. Mr. Pabrai has been very generous with the lessons and information he gives to up and coming Value Investors/Academics. And for this reason I need to list him in my blog. The way he lay’s out all his information and lessons makes it digestible and simple to newer people like us. His resources for all Value Investors is a must see, and you should watch his Youtube Channel and Videos. 100%

Discounted Cash Flow Model

When evaluating a Company’s (FCF) Free Cash Flow currently and for the next 10 years you need to include a Average Growth Rate and also consider what your “IDEAL” return rate is that you want to include within the DCF Model. For a more easier way of explaining this I need you to watch this video below. It will give you a better understanding of “How to calculate the DCF of a Company”.

Margin of Safety

In conclusion of today’s post it seems like it would be worth it to include what I had touched on earlier, “Margin of Safety”. If you are a Hedge Fund Manager or Value Investor, or everyday Accredited Investor knowing and calculating a Company’s Intrinsic Value is incredibly useful when analysing if it is a Investment you want to make. However even though you do find the Value of a Stock or Company you need to add an extra layer of Safety to the strategy before deciding to invest. The way you do this is by adding a Margin of Safety. Benjamin Graham’s Book will give you more info on this. But if your really a Pro? You will likely want more of a tactical explanation, strategy and guidance. So I highly suggest you read Mr. Seth Klarman’s “Margin of Safety”.

To end this chapter of todays very long post, it’s ideal if I say this in conclusion. Even though you may calculate the Value of a Company or Stock? You must make a educated professional judgement if the company warrants a long term investment. Many everyday investors don’t have the temperament nor experience within Value Investing to make these correct calls. But with time and learning to be Risk Averse by, with and through failures? You will learn. I wish you all happy hunting and I do hope you learned a bunch from today’s post. It’s long over due. And let’s make something clear up front.

This post is just a short taste of what Calculating Intrinsic Value is all about. The topic and subject is so deep and wide this post is nothing compared to the expertise out there in the market. If you are a Beginner or moderate investor? Please find a mentor and study the greats/legends like Warren Buffett, Charlie Munger, Bill Ackman, Mohnish Pabrai, Howard Marks, Seth Klarman and others. Then you will begin to see “How to use this post as a spark of which direction you should go to invest in your education, experience and financial gain.”

Godspeed
JS

Accounting, Corporate Finance, Finance Articles, Real Estate

Four Loan Types Business Leaders Need To Know

When you need money as a Investor or Real Estate Developer? You will certainly use one of these Loan types. Entrepreneurs also need to know and digest what the 4 different Loan types are when Investing and using Debt vehicles or Borrowed money.

Kansas City Private Loans, Kc Mortgages and Kansas Missouri Financing Available.

Contact Me HERE NOW!

What you need to know?

What Is a Balloon Payment Loan

A balloon payment loan is a mortgage or loan in which does not fully amortize over the term of the note, thus leaving a balance due at maturity. The final payment is called a balloon payment because of its large size. Balloon payment mortgages are more common in commercial real estate than in residential real estate.

Constant Amortization Loan

In this Method of lending an equal portion of the principle is paid at each period plus interest variable.(On the loans Remaining Balance)Paid in the beginning of each period. Example Photo of the Schedule of Paying the Principle and the selected terms or additional Interest.

Constant Payment Loan

Constant Payment Loan is what most who buy a house refer to as a Mortgage. However in the world of Real Estate this loan example is a simple Loan plus interest schedule you pay back over the life or duration of the Principle.

Here is a Example image of the Simple Calculation of Constant Payment Loan and Interest Schedule.

Interest Only Loan

An interest only Loan is the simplest type of Interest payment loan schedule. Meaning you pay a percentage of Interest on the Principal annually over the life or duration of the loan. Until the loan is paid off. Simple. But here is a image to demonstrate to those who may have trouble computing the schedule. If your anything like myself? I always need extra help. Your in good company.

Loans Interest payments are easy to compute as a Business leader if you understand the basics. This post will help anyone getting in Real Estate of needing to research what Repayment of Loan interest really means.

I truly hope you learned something today. As this post was meant to be lean and mean. I did not want to pose how to calculate the Interest payments. Because often times you will become confused reading the verb-age. So just youtube the Payment Calculations of the loan types. This post was just meant to show what and how things work in the world of Interest loans and Amortization schedules. Cheers to all the Bankers in Finance, and Mortgage Brokers out there. This Post was sparked after I learned that a good man and Titan in the New York Real Estate Community passed last Tuesday. Simply I was watching a Interview and heard Larry start to speak about the Loan types with Son Bill in casual Conversation. And decided I needed to follow up on the Finance Slang and types they were discussing. And Viola this post was born.

R.I.P. to the Good and Great Mr. Larry Ackman.

Godspeed and Cheers To Larry.
JS

Accounting, Finance Articles

The Three Financial Statements

What are the three financial statements in business?

Amazingly most who do not have a Finance or Business background struggle with this question. And these individuals fail to see the future scope of looking at these Documents produced while in the course of business. Most small businesses rely on sophisticated Software to do their books. And I have even seen a Junkyard owner use a simple checkbook register for his sophisticated software to control profits and losses of his small empire. LOL

I can not stress “HOW IMPORTANT IT TRULY IS FOR A ENTREPRENEUR OR Anyone in business to sincerely go take a accounting course online or at a community college.”
-Big 4 Accountant Partner “MY GOOD FRIEND” John.

One thing is for sure? If your not using these statements in your business? Your missing critical finance intelligence and future opportunities. These are the three Financial Statements every Entrepreneur or Business professional needs to become very intimate with.

In conclusion for this short post. Make sure your being educated by a Accounting course. Taking a basic Accounting course will change your business career. Because it did mine. Thank you for reading below is a Basic Accounting Course Video for your future success.

HAPPY COUNTING AND LEARNING!
GODSPEED

Corporate Finance

Corporate Finance Skills | Financial Model Types

I imagine your like myself and wonder “How to be valuable and indispensable to business leaders?”

To drive home my point? I would like for you to take a piece of paper and write down all the skills you personally have, then I want you to write down these words Trust, Loyalty, Reliability. Most college students look for and want a comfy job. But honestly if you have no skills that make you a attractive candidate? You will likely have a very difficult time finding a Company that will want to train you from scratch. Not impossible. Just difficult. You will be out of luck. But what if there was a easier better way? There is Hombre!

If you want to be indispensable to Business Leaders? This post will help you begin that process. This post will detail several Corporate Financial Skills you need to master. Which will make you more attractive as top shelf talent for Corporate Business leaders. Keep reading. This post is written for you.

Can you keep your mouth shut? Can you faithfully complete the mission or Jobs handed to you? Are you loyal? If the answer is no to one of these questions? Your like a stump and deadweight. Your going to be avoided by like the plague. However if you have Financial Literacy, growing experience, and Corporate Finance skills along with a trustworthy good attitude, and you are reliable? You will be a hot commodity and business leaders will be seeking you out.

Got any Skills?

Often times when I am meeting Government leaders in City, State, or Federal office they recognize right away I am a take no prisoners no bull shit type of Entrepreneur. I always keep learning new and useful Bad Ass skills. This makes me a Killer to many Business leaders and Politicians. Being a Jack of All trades has it’s uses. Right now I am studying daily Python Coding Courses and zeroing my sights on Financial Modeling to sharpen my Corporate Finance skills. That means I am sharpening my Business spear. Doing whatever it takes to be a successful team player. And especially adding value for my personal Business Career. I am positive my Partners and Mentors Investment Firm will find my new skills valuable as we evaluate Transactions.

Corporate Finance Modeling

I shouldn’t have to share with all you Entrepreneurs that if your continuing to learn? Your going to be very valuable to Private Equity, Venture Capital, Mergers and Acquisitions Investment Banking, Banks, Big 4 Accounting firms or even within Mergers an Acquisitions. Learning new Corporate Finance Skills will separate your value from most other people. A good Analyst who has experience is highly sought after by large firms. So learning Financial Modeling does have it’s benefits.

“How to learn Financial Modeling?”

This skill alone will propel you above others easily making you a competent Analyst within the Corporate Finance space. I highly suggest you first become Financially Literate before pursuing advanced Corporate Finance Training. The video below, will share some basics Financial Modeling and demonstrate several Different Types of Models.

How to learn Financial Models?

To learn financial models most times a person must just learn step by step within a training program explaining the different Financial Model types and how each model is used. There is not easy way to learn except by doing. This guide can help explain financial models to you.

The Three Statement Financial Model in Detail VIDEO

“The Different Types of Financial Models”

If your anything like myself learning new skills does not come naturally. However with perseverance, time, personal effort and luck? The books, and content you study do tend to start making sense. That growing experience is a investment into your future success. And so let’s make a investment into that future success right now and here on my blog. These are the different types of Financial Models you need to learn if you want to be in Corporate Finance.

The fundamental building block of all financial models is the three statement model. This model includes components that lay out

Assumptions
Income Statement
Balance Sheet
Cash flow statement
Support Schedules
Charts and Graphs

When you look at this model in Excel you will immediately see the Income Statement, Balance Sheet, and Cash Flow Statement are laid out for the purpose of analyzing historical results, Establish Forecast Assumptions, Building the Forecast, Set the foundation for more advanced modeling.

What are Corporate Finance Financial Models?

Corporate Financial Models take mathematical values that are used to calculate assumptions to value businesses and their assets and also for forecasting and budgeting purposes related valuations, debt, equity and other values within business

Discounted Cash Flow Model

The Next type of Model is the (DCF) Discounted Cash Flow analysis model. Or DCF model. This includes all the three standard statement model plus a extra little section all about free cash flow and evaluation.

Components of the DCF Model

Everything as the three statement model
Free Cash Flow (Firm or Equity)
Terminal Value
Weighted Average Cost of Capital
Net Present Value Using XNPV
Internal Rate of Return using XIRR

What is the Purpose of DCF Model?

The Purpose of the DCF Model is,

Valuing a Project, Business, or Investment Opportunity
Determine “How much to pay for a Acquisition?”
Assess the Impact of strategic initiative
Internal FP&A
Raising Capital

What is DCF mean in Financial Models?

A DCF means Discounted Cash Flow Model

Budgeting and Forecasting Models

A Budgeting and Forecasting Model is prepped and used to manage operations in House. It’s usually a monthly type model that monitor the cash inside of a business on a monthly basis. It’s basic forecasting.

The Components of this Model?

Assume Monthly Finances
Drivers of Operations
Three 3 Financial Statements (Previously Mentioned)
Ability to “Roll Forward” the Financial Model
Charts and Graphs for Visual demonstrations

The Purpose of Budgeting and Forecasting Model

Internal Executive Level Planning
Budgeting and Forecasting
Measuring Results and Performance
Strategic Planning
Evaluating Performance of Business

The Valuation Model

The Valuation Model does include a (DCF) and a comparable analysis of a type of Valuation. But also includes these components listed.

Components of Valuation Model?

Comparable Company Analysis
Precedent Transactions
DCF Model
Football Field Chart

What is the Purpose of the Valuation Model

Value a Business
Summarize the Valuation Methods
Create Outputs, charts and graphs for presentation
Present Analysis for Investment Banking & Private Equity Transactions

What is a Valuation Model in Corporate Finance?

Valuation Models in Corporate Finance value the business, summarize the Valuation Methods, Create Outputs, Charts, Graphs and Presentations for demonstrating value of a Business

Introduction to Corporate Finance Course: VIDEO

This is an Advanced Model for Mergers and Acquisitions (M&A)

A M&A Model is a very advanced Financial Model. To start in detail? The M&A Model has the three statement model and plus the DCF Model. And will include Operating Scenarios and Valuation Models and more.

Components of the Mergers and Acquisitions Model

Includes Three Statement Models and DCF Model
Operating Scenarios
Consolidated or Pro Forma Model
Transaction Assumptions Including (Synergies, Financing, take over premium)
Sensitivity Analysis
IRR and Share Price Impact
Accretion- Dilution Analysis

The Purpose of the Mergers and Acquisitions Financial Model?

Primarily the purpose is to evaluate M&A Transactions, Determin how much to pay for an asset or transaction and more.

Valuing a Target Business
Determine how much to pay for a acquisition
Compare Cash Vs. Share consideration
Evaluation Synergies and take over premiums
Asses the net impact of the Acquisition
This is used mainly in Investment Banking and Corporate Development

What is a M&A Financial Model?

Mergers and Acquisitions Finance Models determines how much to pay for a Acquisition, compare cash vs. share consideration, evaluation synergies and take over premiums, asses the net impact of the acquisition, and is used mainly by Investment Bankers and Corporate Development.

The Leveraged Buy Out Model

The leveraged Buy Out Financial Model is a extensive 6 stack of models to give you the absolute best analysis available for layered analysis.

The Components of the LBO Model

Three Statement Model and Operating Model
Operating Scenarios
Transaction Assumptions (Financing, Debt, Tranches, Takeover premiums)
Debt and Interest Schedule
Levered IRR analysis by investor criteria
Sensitivity Analysis

The Purpose of a Leveraged Buy Out Financial Model

Value a target Business
Determining How Much To Pay For An Acquisition?
Asses How much leverage can be used
Maximize the Equity IRR
Evaluate the Scenarios and Sensitivity
Obtain Financing and make a investment decision

This post was written in hopes to give you several main types of Financial Models used in Corporate Finance. I sincerely feel if you learn all of these and continue to learn as a Entrepreneur, as a Corporate Finance Analyst or Investment Banker? You will be valued and needed inside Private Equity, Investment Funds, Investment Banking, Wall Street Boutiques and even Big Firms like Blackstone and the Big 4 Accounting firms. Please take what you want from my growing experience. And Use it. It is a privilege you shared a little of your time here and found my blog useful. Thank you. And to all the Business leaders inside the Corporate Finance or Business Space? If you are needing some Professional Skills that I can provide? Please contact me “HERE” . I would be happy to help. Thank you for reading. Godspeed.

Accounting, Business Articles, Mergers and Acquisitions

Maintenance Capital Expenditures What?

Since your likely in business, a Business professional, or a Entrepreneur who is researching to find more information about the meaning or differences between CAP EX and Maintenance Capital Expenditures? I have great news for you. I am willing to help answer this question for all you Google Searchers. Today’s lesson will be directly about a particular line on your Investing activities cash flow statement, Operating Expenses details, and Balance sheets.

So everybody if you have not yet taken basic Accounting classes? Your likely like me and studying as you go. It’s a ongoing challenge. However you have no excuse in todays online information super highway and access. So in the spirit of sharing cool new Accounting information I discover? And for the fact I find myself implementing this new knowledge in cool ways. Let’s talk about today’s latest topic I discovered while researching what is Intrinsic Value in Investing . Which by the way is an entirely different topic in it’s own right. Now on to the main event. Maintenance Capital Expenditures.

Did you catch my latest article about “Wealth management Trusts?”

What is this “Maintenance Capital Expenditures or CAP EX”?

You don’t need to be an Accountant or business superstar to run a small time Lemonade Stand in your neighborhood. So as you begin to sell lemonade? You will likely have cashflow on the balance sheet. This is where things become interesting.

Today we are talking about financials? I would love to detail what the line on your Financial Statement that say’s Maintenance Capital Expenditures.

When we look at a company’s cash flow statement which you should know “ENTREPRENEURS!” you will be looking for the line CAP EX or Maintenance Capital Expenditures.

Please don’t overcomplicate the info here. However when reading a Cash flow statement you will see a line called Capital Expenditures. It’s the exact same thing as a Maintenance Capital Expenditure. Cap Expenditures and Maintenance Capital Expenditures are the same thing. Often times I do see people who confuse CAP EX with Maintenance Capital Expenditures. Don’t let this confuse you. It’s the same.

Here are the two classifications that capital expenditures can fall under.

When

Maintenance CapEx: Is the required ongoing expenditures of a company to continue operating in its current state (e.g., repair broken equipment, periodic system updates) Operating Expenses.
Growth CapEx: Is the discretionary spending of a company related to new growth strategic plans to acquire more customers and increase geographic reach

According to a friend at a local Regional Law Firm and as TAX Attorney and Accountant,

An income statement reflects operating expenses incurred during a period of time.

Capex is considered a long-term investment, rather than an operating expense, because it has an economic life greater than a year (unlike operating expenses).

In conclusion in today’s lesson if you are running a Lemonade stand during the summer while teaching your kids the proper way to expense a business? I hope you would now clearly see? That Capital Expenditures and Maintenance Capital Expenditures are the same and they are for all the little things the business needs to operate and create free cash flow in the simplest of terms. Stay hungry, stay curious and be fearless when walking among Captains of Industry.