By: Adam Heist
You make the sale to a business by understanding what kind of business that you're dealing with. This means looking at the operating cash flow, the free cash flow, the sales, the financing debt capital and financing equity capital.
A company's operating cash flow tells us how its operations can finance the business. Remember that available cash is a key parameter. A company's free cash flow is the operating cash flow less cash invested in capital expenditures. Another key parameter is how long is a company's cash cycle is.
That is the amount of time from the production and investment in new inventory, to its sale and the collection of the cash for that. Sales and profit margins tell us about the company's ability to attract new investment and their ability to expand the gross amount of their sales. We want to see how much the company is spending on new business, through hiring new sales people and offices, and making available to itself necessary plant and equipment.
If companies are not raising enough cash through the operating cash flow to cover their investments, they will have to go to financing. This means going into debt. Another way that companies can raise cash flow is to go to the capital markets through venture capital, or raising money through selling stocks by an IPO (Initial Public Offering). The owner then becomes beholden to stock holders, but there is no faster way to raise new capital.
Companies do not occur in isolation. You have to look over their industry and how they relate to and compare to other companies in their industry. Is the company's executive's profit margin being squeezed tighter and tighter? Or does he have new products that because of their novelty can command a wide profit margin?
Once you have identified the specific industry, you want to understand the competitors that the company faces in that industry. The information that you can gather from publicly traded companies allows you to map several competitors to investigate. You can look at the public information, and guess similar parameters for privately owned, closely held companies.
It is important to understand how specific companies line up in the competitive space as well as on a corporate level. Are companies in that field able to have local production, or are they forced to "globalize" and get the cheapest price available in the world? Are they sacrificing quality in order to get the greatest quantity of cheap production?
About the author:
Adam Heist is widely recognized as an expert in all Loans related circles. Adam boasts over thirty years experience in secured finance related fields. Adam has appeared in many newspapers, and in article directorys and website across the internet. Visit us today.
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