Question

3. Discuss why cash flow projections are so important to lenders and investors. What common mistakes are new entrepreneurs likely to make in their cash flow planning?

Answer 1

ANSWER:

GIVEN THAT:

THECASH FLOW PROJECTIONS ARE SO IMPORTANT TO LENDERS AND INVESTORS:

1. Cashflow is the ultimate measure of how a business is doing and that makes cashflow a vital indicator for investors when analysing whether a company is making money, or losing money.

2. When approaching private investors, funding organisations or finance providers, it’s important that your business can provide the right level of financial reporting.

3. Your cashflow statement (or statement of cash flows) is key report for investors to review and analyse.

4. By running a statement for a given period (whether that’s the past month, quarter or year) you can get a clear breakdown of the key areas of cash movement in the business.

THE CASH FLOW STATEMENTS ARE THREE MAIN AREAS AND A NET SUMMARY:

A. OPERATING CASHFLOW:

B. INVESTMENT CASH FLOW:

C. FINANCING CASH FLOW:

A. OPERATING CASHFLOW:

D. NET CASH FLOW:

1. This section of your cashflow statement shows the cash inflows and outflows that relate to the everyday running of the business.

2. This is where investors can see what money you’re generating as income, and how much you’re spending on operating overheads, expenses and other related costs.

B INVESTMENT CASH FLOW:

1. This is where investors will see cashflow from investments.

2. This includes investments that are generating revenues from non-current assets (assets that won’t be turned to cash within the current accounting year), or securities that can’t be classed at cash equivalents.

C FINANCING CASH FLOW:

1. This sections shows investors the flows of cash between the business and its owners and creditors.

2. It’s where they’ll find numbers relating to borrowing funds, repaying debts, payments of dividends to your directors and capital that’s been brought into the business during the relevant period.

D NET CASH FLOW:

1. The three preceding sections are brought together in the bottom line of your cashflow statement – giving a net cashflow number.

2. The cash inflows and cash outflows are summed together so investors can quickly see whether the business is in a negative or positive cashflow position.

3. By analysing these cashflow numbers carefully, potential investors can see if the company is in a positive (or negative) cashflow position – and can use this metric as a key measure of whether you’re likely to be a good (or bad) investment.

THE COMMON MISTAKES ARE NEW ENTREPRENEURS IN THEIR CASH FLOW PLANNING:

A. Overestimating future sales volumes.

B. Engaging in impulse spending during the startup phase.

C. Being passive about past-due receivables.

D. Not using a cash-flow budget.

and the most common mistake done is by

E. Not keeping a cushion of cash on hand.