Understanding the Intricacies of Cash Flow Statements
Cash flow statements are a lesson in reality for many a fledgling investor.
Seeing on paper in no uncertain terms how much money is coming in and also going out is a somewhat humbling lesson for some. Yet what makes the use of this tool so utterly valuable is the fact that it specifically itemizes the various sources of cash in the same way that it assigns a line item to any cash that is paid out.
Generally speaking, an investor has the ability to generate cash flow statements on a monthly, quarterly, or yearly basis; of course, the new investor will be wise to run the reports as often as possible.
Understanding the intricacies of cash flow statements requires you to become familiar with the basics of your business' balance sheet and its assets and liabilities. At the same time, you need to expertly designate cash and its equivalents, although small time investors sometimes choose to forego such detailed break downs in favor of a broader approach to the listing of all activities involving cash.
An example of the average very basic cash flow statement could be as follows:
- Determine the time period covered by the statement.
- List all monies received from your business. In the case of a real estate investor in multi family dwellings, this may pertain to the rent monies received from the tenants, but will not necessarily include any deposits offered, since they are not considered income.
- Next determine the cash that left the business. This may be due to reinvestment in the property but also any money related to the financing of the deal.
- As you subtract your cash expenditures from your cash income, you will be left with the increase or decrease in your overall cash flow.
What makes the generation of frequent and also periodic summary cash flow statements so valuable to the real estate investor is the fact that it provides accurate and snapshot details with respect to your overall solvency and ability to generate liquid funds if needed. Investors in future ventures you might wish to consider want to know that you will have the necessary funds to sustain any properties in which they may invest their funds.
At the same time, investors like to see that you have an eye for money making properties as opposed to misjudging the market or the neighborhood into which you are buying, thus leading them to believe it is reasonable that the latest venture you are considering may be another property that has the potential to fail to live up to your expectations and representations.
Since an integral portion of a detailed cash flow statement is the forecasting of any future cash flows - whether incoming or outgoing - this is your opportunity to shine and show off your business acumen and ability to make good money with any funds investors want to send your way.
This is also a great way to attract new investors into your pool of ready to go individuals and clubs who are prepared to put up money for your ventures. |
