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Just as your pulse is checked during a routine physical, free cash flow is used as an indicator of a company's health. It equals the cash brought in from operations minus the money needed to pay the bills. Think about leftover money in your checking account after you pay this month's bills.
Investors and analysts see this leftover money as a gauge of a company's ability to perform. It is available for transactions such as handing out dividends and working on new products.
Some argue free cash flow is wrongly overshadowed by the emphasis often placed on earnings. Earnings numbers can be manipulated and don't always tell the whole story -- and earnings don't mean much if there's nothing left over after a company pays its expenses. Even if you bring in a six-figure salary, but no money left after paying the bills, are you in great financial shape?
You don't have to be Einstein to figure out free cash flow. To calculate the number, subtract the company's expenditures and dividends from its operating cash flow.
If the free cash flow is written in red ink, it doesn't necessarily signal curtains. This is common for young companies looking to grow. It also could be a result of heavy investments, which in the long run could be worth a standing ovation.
Home / Personal Finance / Financial Planning / Tax
Monday, April 14, 2008
Report Finds Drop in Tax Audits of Large Companies
Associated Press
WASHINGTON --The tax audit rates of the largest companies are less than half what they were 20 years ago while more small and mid-size
businesses are coming under scrutiny, according to an organization that monitors the Internal Revenue Service.
The
Syracuse University-based Transactional Records Access Clearinghouse described what it said was a "historic collapse" in audits
for corporations holding assets of $250 million or more. About 26% of them were audited in the 2007 budget year compared with
34% in 2006 and 43% in 2005.
The IRS did not dispute the numbers, based on agency data. But it strongly disagreed
with suggestions it was easing oversight of the biggest corporations.
Enforcement revenues from large companies
rose by one-third in 2007 from the previous year, from $10.6 billion to $14.2 billion, said IRS Deputy Commissioner Barry
Shott, who heads the Large and Mid-Size Business Division.
While the number of examinations has declined, "what
we are doing is focusing our resources better on where the noncompliance is," Shott said in an interview with The Associated
Press.
Shott said the focus in recent years has been on tax shelters and `extraordinarily complicated" partnerships
and S corporations where shareholders, rather than the company, must report income or losses. Last year the IRS examined 17,700
S corporations, compared with 14,000 the previous year, and 12,200 partnerships, compared with 9,800.
But the TRAC
report concluded that the IRS also was concentrating on regular small and mid-sized companies to boost audit numbers.
"Moving
the focus of the corporate auditors away from the large corporations and toward the smaller ones has been quite effective
when it came to increasing the overall number of these kinds of audits but actually was counterproductive in financial terms,"
the researchers said.
The new IRS commissioner, Douglas Shulman, said in a response that he intends to make "targeting
noncompliance with our tax laws ... a high priority."
According to IRS statistics, 15%, or 4,473, of companies
with $10 million to $50 million in assets were examined in 2007. That compares with 12.3%, or 3,535 companies, that were audited
in 2005.
In the same two years, the percentage of audits of corporations in the $50 million to $100 million range
fell from 16.4% to 11.4%. For corporations in the $100 million to $250 million range, the percentage dropped from 17.5% to
12.1%.
Among the largest corporations above $250 million in assets, 3,424 were audited in 2007, down from a peak
of 4,859 in 2005.
TRAC also questioned the financial benefits of the shift. The group said that last year the government
uncovered $682 in additional recommended taxes for every revenue agent hour spent auditing the smallest corporations, compared
with $7,498 in additional taxes for audits of the largest corporations.
Dean Zerbe, national managing director
for Houston-based alliantgroup, which provides tax services for medium-sized companies, said his fear was that "in the IRS'
zeal to show Congress improved numbers in corporate audit, it is America's small and medium businesses that are taking it
on the chin."
Shulman told the Senate Finance Committee last week that audits of businesses in general rose from
52,000 in 2006 to 59,500 in 2007.
He acknowledged that audits of the largest corporations were down. But he said
that "in times of flat budgets, the agency cannot increase activity across the board, but must address the areas where there
is growth and potential risk."
Shott also cited a new program where larger companies work with the IRS during the
year so there will not be disputes at tax-filing season. Participants in this program rose from 17 in 2005 to 73 this budget
year, he said.
The returns of these companies do not show up in enforcement statistics, he said, but the collaboration
can avoid controversies that can go on for years.
Having more money was not necessarily an advantage for individual
taxpayers. The IRS said that last year it audited 9.25% of those with incomes of more than $1 million, compared with 6.3%
in 2006. For those earning less than $100,000, the chances of getting audited were less than 1%.
The tax agency said total enforcement revenues in the 2007 budget year, from collections and appeals activities, were $59.2 billion, up from $48.7 billion the previous year.
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