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using-offtoa:analyze-business:financial-review:cash-flow-analysis [2016/05/29 09:06] mdavis |
using-offtoa:analyze-business:financial-review:cash-flow-analysis [2016/09/05 14:22] (current) mdavis |
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| **Questions:** | **Questions:** | ||
| - | **What does //pro forma // mean?** | ||
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| - | When financial statements are being used to document your prediction of what the company will do, they are called //pro forma//. In this context, pro forma means "projected future status" based on all your business assumptions, as opposed to your company's real financial statements. It is Latin for "as a matter of form." | ||
| **What is so terrible about spending a lot on R&D in the first year?** | **What is so terrible about spending a lot on R&D in the first year?** | ||
| - | 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. | + | 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. |
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| + | 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?** | **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. | + | 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?** | **What should I do if my cash flow statement analysis says I'll run out of cash?** | ||
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| * Less expense (change your expense assumptions, but make sure this doesn't negatively impact revenue) | * Less expense (change your expense assumptions, but make sure this doesn't negatively impact revenue) | ||
| * More loans (change your loan assumptions) | * More loans (change your loan assumptions) | ||
| + | * Extend the term of the loan (change your loan assumptions) | ||
| + | * Lower the monthly loan payment, and expect to pay more when the loan matures (change your loan assumptions) | ||
| + | * Change to a different type of loan, e.g., interest only (change your loan assumptions) | ||
| * More investments (change your investment assumptions) | * More investments (change your investment assumptions) | ||
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| 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. | 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. | ||
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