Look at cash flow statement before investing

Posted by juliabennet on December 7th, 2012

If you are a prospective lender what would you like to see in the books of a company you intend to loan money to? One of the points you would surely consider is the cash reserves of the company. There is no company in the world that doesn’t have debts – this is the way business works. But when a company has deep cash reserves it shows the strength of its business and business planning. This is when a lender doesn’t mind lending money to the company. And it is a cash flow statement that shows the cash reserves of a company. And many a business owner would learn how to write a business plan and present it to you so that you feel all the more comfortable lending money to the business.

How to write a business plan? Is it necessary for a business owner to know this? There are so many financial advisors that can do this job with aplomb. A business owner can hire one of them and pay them good money and they will make a perfect business plan. The question is whether the business owner can afford such a financial advisor when the business is about to launch or when it is still small in size. In many cases the business owner would write the business plan on their own. And it is so simple that any visionary entrepreneur can write the plan.

When someone goes through information on how to write a business plan they will see that it contains everything related to the business. It shows the current status of the business and where it is headed in a few years’ time. The business plan will also show the details of the management team and the employee database including manpower planning to be able to achieve the future targets. An investor will also be able to see the marketing strategy and the operating strategy of the business. And of course, the financial strength and planning of the organization would also be mentioned in the plan. All in all, a business plan is intended to show the creditors the business is a good investment and investors will be paid in full with a reasonable return.

A part of the business plan is the cash flow statement. The purpose of this statement is to show the inflow of cash into the business and outflow of cash from the business.  In addition, the purpose of the cash flow statement is to show that the business is capable of meeting short term debts. The statement also shows how liquid a business is, i.e. how solvent it is and whether it can keep its commitments regarding cash payments. The statement also shows future financial planning of a business and how cash inflows will materialize to meet future business and financial needs.

As an investor you would not want to invest money into a business without seeing the cash flow statement and other relevant statements.

You would be happy to invest in a company that has a positive cash flow statement and the business owner knows how to write a business plan.

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