Question

Explain what cash flow pattern would normally be expected in the first year of a new company.

Answer 1

Answer : There are generally three types of Activity in which a cash flow is expected by the company be a startup company or a established Company.They are Operating Cash Flow , Investing Cash Flow and Financing Cash Flow.

But in cash of Startup compoany the pattern of this cash flow differs.Such as Operating Cash Flows are tjose cash flows which arises as a result of operations of the company such as payment to creditors , receipt of cash from receivables,payment of expenses.In case of a new company generally the oprating cash flow is neagative , because a new company doesnot generate much profit and there are varoius kinds of expenses of the business.Therefore it has been observed that in case of new company cash flow is negative in the first year.

Taking Investing Activties in case of new company investing Cash flows are also Negative because in the first year of operation , business requires the large amount of investment in plany and machinery , they need to purchase various Assets to run a business.

Now,comes Financing Activity , Fiancing Activity seems to be positive because financing activities are those activities which are related to finacing activities such as raising of capital through common equity , Debenture and various other sources .Therefore in case of new company there is positive financing cash Flows expected in year 1