After the income statement, Twaddell says many equity investors
check the cash-flow statement to see what's really happening in
the business. It's this statement that makes adjustments for
all noncash transactions to show just how much cash is used or
thrown off by a company. Items such as depreciation-an expense that
cuts into earnings but doesn't eat into cash-are added to cash
flow. Accounts receivable, which get booked as revenue but
don't provide real cash, are taken out of the cash-flow
calculation.
There are myriad inferences investors can draw from cash-flow
statements, says Twaddell. But ultimately, they're looking at
the capital intensity of the business: "how many dollars have
to go in on the front end before one pops back out on the back
end," he says. Seasonality (which requires companies to spend
even when revenue is not being generated), lengthy collection
periods and growing accounts receivable require capital. So the
question in investors' minds becomes, How much capital will
this business require, and is there a plan in place to fund its
growth?
Investors Capital scored well here, says Twaddell. The
company's receivables, mostly commissions from insurance
companies, were paid in 30 days or less. There was no cyclicality
in the revenue stream to speak of, and cash-flow statements showed
the company was almost entirely self-funding. "As a
result," says Twaddell, "the capital raised in the IPO
wouldn't be used to fund operations but expansion and,
presumably, increased earnings-raison d'être for most
equity investors."
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Originally published in the January 2001 issue of Entrepreneur Magazine
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