Corporations operate in much the same manner. First, like a paycheck, they generate cash from operating the business. This is called Operating Cash flow (OCF). From this, they subtract their Capital Expenditures. Capital expenditures are expenses for capital equipment and other physical property, like real estate. What’s left over is their free cash flow.
A. The business Plan clarifies the financial needs of the business and causes you to prepare a projected balance sheet, income statement and most important of all, a cash flow examples, the most important start up financial statement and the only predictor of success that i know.
A company might clear all these hurdles, but sell at too high a price to be an attractive investment. It all depends on how much its prospects are worth.
When I mention Cash Flow, I refer to what some people might refer to as an Income Statement. Cash flow is the summary of how much money you had coming in and how much money you had going out over a certain period of time. For most people, this period of time is a month because that is how often most of your bills come due, yet it is a short enough period of time that you can use the information to make timely adjustments to your income and expenses. The idea, of course, is to have more money coming in than you have going out.
The “negative” side of your Net Worth is what you owe. This includes your house mortgage, HELOC loans, car loans, credit card debt, student loans, and any loans you owe to other people.
Believe it or not, a very large percent of people who invest in the stock market are investing their hard earned money based on the above examples without any further research.
You should aim to put at least 20% of your net pay toward paying down your outstanding debts. If you cease to add to your short-term debts today, you will find that you can pay off most of your short-term debt anywhere from 3-7 years.