How to Analyze a Pro Forma Cash Flow Statement:
Every investor pitch and loan application will include a subset of a pro forma cash flow statement for investors and lenders to review. Any investor or lender interested in performing due diligence will ask for a more detailed pro forma cash flow statement. Offtoa performs an analysis of the cash flow statement looking for the same properties that many investors and lenders look for; these are properties that often foretell a poor financial outcome for the company. In the case of the loan, the cash flow statement shows whether the company will be able to make make payments on the loan according to the terms of the loan. The primary reason for surfacing these issues is to find solutions early and to prevent problems. The primary reason for using a tool like Offtoa to find these issues is so you can either:
Here is a partial list of the kinds of problems that Offtoa looks for
Whenever Offtoa finds a potential problem, it highlights the symptom for you on the cash flow statement, and offers a list of suggested solutions, each of which describes exactly which assumptions you need to change to fix the problem. However, don't just “fix” the problem by blindly selecting one of the suggestions. That will result in you having a set of financial statements that look good but have no basis in reality. Instead, make changes to assumptions that you believe are feasible and then change your business strategy to reflect the new plan. If none of the suggestions are feasible in your mind, then perhaps you don't have a viable company :).
Questions:
What is so terrible about spending a lot on R&D in the first year?
Start-ups: Nothing at all! But very few traditional investors (i.e., angels and venture capitalists) are interested in investing in R&D. They are already taking huge risks by investing in already-built products that have not yet been proven to be “right” for the market. Why should they take on the even larger risk that the product may not even get built? On the other hand, smart, lean entrepreneurs will iterate constantly with minimally viable products, test marketing them and learning from the experiments. These companies are often funded, but they do not exhibit huge spikes in R&D dollars during their initial years. So, if you need to invest a lot of money building a product up front, you have only three choices: (1) do it on your own dime, (2) find a Government agency to support you with a grant, or (3) do it in very small increments as a lean start-up.
Ongoing Businesses: If you are a business with a history and looking for investment money or loans to fund a major R&D effort, a much better approach is to use the cash generated from your existing business to fund the R&D. If that is insufficient, then read the previous paragraph because they apply equally well to you.
What is so terrible about spending a lot on purchasing fixed assets in the first year?
Your company may need such infrastructure to succeed. In such cases, make sure you find investors attuned to your industry. Lease whenever you can. On the other hand, lenders will often lend companies money for the purchase of fixed assets. The fixed assets themselves serve as collateral.
What should I do if my cash flow statement analysis says I'll run out of cash?
The good news is it is better to know this while you are planning your company! The lowest point on your monthly cash flow statement tells you how much more cash you will need through some combination of:
Why is it so bad for operations to not produce cash? After all, there are three sections to the cash flow statement.
The top third of the cash flow statement tells you how much cash is being generated by the business itself. You could consider the other two thirds to be like life support. If your business requires constant influx of cash from loans or investments (or selling fixed assets), it is not a viable business. In fact, it is precisely what Eric Ries would consider a company without a sustainable growth engine.