Rule #1 Finance Blog

With Investor Phil Town

InvestED: Ep. 183- Owner Earnings: Net Change: Accounts Receivable & Accounts Payable

This week we are diving deep into the next phase of our owner earnings calculations: Net Change: Accounts Receivable and Net Change: Accounts Payable. We will try to clear the air as to why this calculation is so important and why generally accepted accounting principles are to be guarded against.

In Episode 183 You’ll Learn:

Net Change: Accounts Receivable and Net Change: Accounts Payable

  • Accounts Receivable: When a company is owed money.
  • Accounts Payable: When a company owes its suppliers money.
  • These are two important additions to our calculation of owner earnings.
  • Warren Buffett refers to these as “certain other non-cash charges” which are considered when calculating owner earnings.
  • By adjusting accounts receivable and accounts payable, a company can utilize capital without taking a loan.

The Owner Earnings Formula:

  • Net Income + Depreciation and Amortization + Net Change: Accounts Receivable and Net Change: Accounts Payable + Income Tax + Maintenance Capital Expenditures
  • Most of these numbers can all be pulled from the financial statements.

Important Formula Notes:

  • Our owner-earnings calculation should be used to guard against the accounting choices made to alter numbers.
  • We can easily approach it as renting out property, where the owner earnings is the money to be put in one’s pocket.
  • Cash Flow vs. Owner Earnings:
    • The difference is that free cash flow doesn’t require any subjectivity, but the answer you’re getting includes paying taxes and other growth numbers. What we want is to be able to have another view.
    • Owner earnings calculations are aimed at a raw, accurate number unencumbered by accounting flaws.
  • We want to approach our calculations pre-tax.

Danielle and Phil Recommend:

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On the InvestED podcast, Phil and his daughter Danielle shine a light on the successful investing strategies that gurus like Warren Buffett have used for 80 years. Listen in for a great stock market education on basics, learn how to invest on your own, and follow along with real-time examples and investing tips from week to week.