Cash flow refers to the available cash from an investment activity after receiving all revenues & after payment of all debts. Having sufficient cash on hand help ensure that employee, creditors, and others can be paid on time.
If a business or person doesn’t have ample cash to support its operations fully, it’s said to be in debt or insolvent and a likely candidate for bankruptcy-(if the insolvency continues). The financial statement of a firm’s cash flows is used by financial analysts to measure the firm’s business performance.
Organizations with sufficient cash flow have the ability to invest the money back into the company to generate more profit and cash. Cash flow sources for businesses include
#Cash flow from disposing of off assets-This will make any lender nervous. If your business has decided to take this approach, you need to find out if your assets are no longer required in their current business model, If they’re important to operation activities, what basis is the business leasing the asset , do they contemplate to continue this way or do they simply expect to replace or restore the equipment?
#Cash flow from borrowing funds from someone else-Find out what the business’s overall plan is & when you are supposed to repay the loan. Borrowing long term to solve short-term operating losses is not prudent.
#Cash flow from owner-capital contribution-If the business is short of operating cash flow to service their debts_this might be the source of cash flow you as a borrower would like to see, “coming to the table” to save your business.
#Cash flow from running down cash balances-If the business had excess liquidity-(this is okay when it comes to short-term financing). The reason to have an excellent liquidity is -to have a backup plan just in case of a downturn. You should check to confirm how longer your business can operate this way without creating a cash shortage.
#Issuing of debt & the repayment of debt when debt is given; the business receive cash that requires to be paid at a later date.
#Free cash flow-Free cash flow is that cash that the management can utilize at its discretion. The importance of this cash flow shouldn’t be underestimated. Free cash flow can be used to repurchase debt, retire debt, expand current offerings, pay an additional dividend or create new products.
#Issue of shares-cash is received & ownership is diluted once an organization issue stock. Raising funds by issuing shares isn’t a bad sign, as-long-as the company is growing at an acceptable rate.