The Missing Piece in Liquidity Calculations - Why calculating the “current portion of fixed assets” would provide a more accurate picture of financial health (April 2012)
The first startling discovery was that working capital and the current ratio routinely understate liquidity because there is an account missing from the balance sheet: the Current Portion of Fixed Assets (CPFA). The breakthrough concept of CPFA was first published in the America’s premier accounting journal and subsequently expanded in a two-part series in America’s leading banking journal
The “Missing Piece” illustrated
This 12 minute video illustrates graphically the compelling logic of the Current Portion of Fixed Assets and how it resolves the paradox of negative working capital.
Negative Working Capital is not Negative – Heresy or Revelation?
The discoveries in the Journal of Accountancy were subsequently expanded in two articles in America’s leading banking journal, The RMA Journal. This first article provides the step-by-step graphics seen in the video above (The Missing Piece Illustrated), illustrating how the paradox of AT&T’s multi-billion-dollar negative working capital is resolved by the Missing Piece, the Current Portion of Fixed Assets.
A more exciting discovery is explained in the second article and related video below!
Trading Capital vs. Working Capital
Two Tiers of Liquidity
This sequel illustrates the alternative solution for correcting the calculation of working capital: remove CPLTD from the formula. The result is a new concept: Trading Capital, which reveals that there are two tiers of liquidity—Trading Capital and Working Capital—that together provide greater analytical insight into a company’s true liquidity than was possible before.
The “next tier” in the analysis of liquidity and loan repayment!
“Trading Capital vs. Working Capital” this video graphically illustrates the two tiers of liquidity, empowering the analyst with a deeper understanding and sharper measurements than was possible before.
Is CPFA a Current Asset?
The discovery of the Current Portion of Fixed Assets (CPFA) is a major paradigm shift. This video answers a decade of questions and challenges, including the most provocative: Should CPFA be treated as a current asset?
Cash Flow Lending
Principles Based on Sustainable Cycles
Here is the complete framework for viewing cash flow in terms of natural, recurring cycles that led to discoveries such as the Current Portion of Fixed Assets and the stratification between Fixed Capital, Trading Capital, and Working Capital.
The analysis of liquidity risk and loan repayment is significantly enhanced by measuring the sustainability of cash flow cycles with new, precise primary coverage ratios and cross-cycle ratios. Ultimately, theory finds practical application by identifying cash flow problems and crafting appropriate remedies.
Now available in both print and digital formats!
More Articles by Stephen Bartoletti
Why Maintenance Capex should not be deducted from operating cashflow
Maintenance Capex is an important use of cash that must be included in cash flow analysis. However, it must be analyzed within its natural balance sheet cash flow cycle. M-Capex is an investment cash flow that must be matched with its natural financing cash flows. Deducting all of M-Capex from operating cash flow overstates the deduction which can lead to missed lending opportunities and even lost clients.
An Argument for Restoring the Importance of Balance Sheet Cash Flows
Today’s linear analysis of cash flow focuses on operating cash flow. That may be useful for security analysts, but for SME lenders, the loans we make are financing cash flows, which are used to acquire assets—investment cash flows. This article reexamines the importance of balance sheet cash flows, which are largely overlooked because they are missing from—netted out of—the Statement of Cash Flows.
Stephen M. BartolettiSmall and Medium Enterprises (SMEs)
are at the heart of economic development and job creation.Small and Medium Enterprises
are also at the heart of commercial bank lending and leasing.
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The author welcomes the opportunity to discuss these new ideas, be it one-on-one, a small meeting of professionals, or a more formal speaking engagement, with accounting professionals, academics, business associations, or lenders.
