Operating Cash Flow: A Quick Guide

Every day, entrepreneurs across the world come up with ideas that might turn out to be multi-million dollar businesses. Regrettably, those lightbulb moments quickly fade if there’s no financing available to see them through. Ideas keep vanishing because there’s no capital to bring them to life. Fortunately, there is a way to navigate this issue. Our discussion of venture capitalist vs. angel investor will allow you to regard the above scenario in a positive light. We’ll compare angel investing and venture capital, learn their differences, and weigh the pros and cons that should help you choose the right one for your business or startup. What Is an Angel Investor? An angel investor is typically an individual or group of individuals with high net worths (surpassing $1 million) who invest in small or growing businesses. Angel investors usually invest during the early stages of a business, either before operations commence or right after. With angel investing, small businesses get a chance to secure seed funding. In return, angel investors can get convertible debt or equity in the business, become part owners and/or shareholders. The Securities Exchange Commission requires that angel investors be accredited. Accreditation is important to ensure that the investor or group of investors are financially sophisticated. They should also be able to fend for themselves, especially in the event of a loss. In our comparison of angel investors and venture capitalists, we will see that this is one of the most salient points, as it protects investors.  To earn such accreditation, investors must meet either of the following two criteria: Earned an annual income of $200,000 for two years before the accreditation and has a high chance of retaining such earnings in the future. Where taxes are filed with a spouse or spousal equivalent, the income is pegged at $300,000 annually (a monthly income of $16,667 and $25,000, respectively).  A net worth of over $1 million. What Is a Venture Capitalist? To engage in a venture capitalist vs. angel investor conversation, first, we need to look at the definition of a venture capitalist. Namely, a venture capitalist is an individual or corporate entity that invests in small and growing businesses with funds pooled from investment companies, banks, pension funds, and other sources. This means the money invested doesn’t necessarily belong to the venture capitalist. Investors in this category will also not invest at the early stages of the business but when they see potential or actual growth.  Investments by venture capitalists are considered high risk, but the potential for growth shown by the small business can easily offset the risk of a bad investment.  Difference Between Venture Capital and Angel Investing Venture capital and angel investing have similarities in that they focus on small and growing businesses. There is also their preference for technology and science sectors because they tend to show considerable growth and provide more investment security. Moreover, both kinds of investment can earn a reasonable stake in the business, and options for conversion of debt to equity can be made available. Regardless of these similarities, there are also notable differences that set them apart. This is why a comparison of angel investors and venture capitalists is indispensable before a business decision can be reached. Below are some aspects where their differences shine through. Amount of Funding Available An angel investor will typically invest hundreds of thousands of dollars because they are investing their own money. Venture capitalists, on the other hand, will invest millions of dollars because they have more access to a range of funds.  Types of Investors As already stated, angel investors are wealthy individuals or groups of individuals with high net worths. Meanwhile, venture capitalists take on high-risk investments with funding from third parties. Time of Investment Angel investing is usually done at a more vulnerable point of the business, which is a higher risk. Businesses that have angel investors are generally in their early stages, before or right after operations commence. Conversely, venture capitalists prefer to invest in more established businesses that have higher chances of providing tangible returns. To be fair, this is not out of place, considering that the funds belong to third parties. Level of Involvement Regardless of the type of investor, there’s a desire to become involved in the activities of the business they invested in. The aim for both venture capitalists and angel investors is to have a firsthand idea of how their investment is being managed and the steps being taken to ensure their returns. Angel investors tend to become part owners and get involved in the day-to-day operations of the business. But, in some cases, they are satisfied with only providing financial support. Venture capitalists, on the flip side, prefer to get involved in the decision-making by being on the board of directors. Due Diligence Due diligence is one of the most important segments of any investment process for angel investors or venture capitalists. Angel investors will usually conduct basic due diligence checks because they own the investment sum and won’t be held accountable by third parties.  Venture capitalists are more prone to lawsuits in the event of reckless investments because of the fiduciary responsibility to their clients and other third-party institutions. For this reason, they are liberal with the resources that go into due diligence, preferring to ascertain in the preliminary stages that the investment doesn’t pose any risk. Industries of Interest As a rule of thumb, an angel investor will invest in an industry they are familiar with. This is either because they have made money in that industry, or understand the workings. Venture capitalists are more interested in industries they consider profitable. Angel Investor Pros and Cons Angel Investor Pros Angel investors are more willing to take risks with their own money by investing in businesses that have just launched operations or are about to do so. In most cases, angels only require a return on their investment at a future date of the anticipated growth of the business. This is more convenient than debt financing with a set payback date. Mentorship opportunities may present themselves because angel investors are familiar with the industry they have invested in. As startups need all the guidance they can get, especially when navigating challenges, angel mentorship is valuable. With angel investing, there is flexibility to convert the investment sum into equity in the business. This saves the business owner from having to repay bank loans when the business is going through a rough patch. Angel Investor Cons Since angels invest their own money, their funds may be insufficient. The consequence is that a business owner will need to bring several angel investors on board and potentially deal with a slower funding process. Some angel investors may become difficult to work with when they insist on having a say in your business without having some level of ownership. Venture Capitalist Pros and Cons Venture Capitalist Pros Venture capitalists can and will most likely leverage their connections and experience in the industry to market and promote your business. This is a win-win situation for both parties involved. Just like angel investors, they may grow your company by sharing their industry knowledge and referring professionals to work for. Venture capitalists can also convert their investment sum to equity in your business and eliminate the need to pay back funds at a set time. They can provide more substantial amounts of money your business needs to grow. Venture Capitalist Cons As is the case with angel investing, venture capitalists tend to have a say in your business due to the significant investment they’ve made. Expectations may get too high and can only be remedied through a balanced decision-making process. The likelihood of a buyout by venture capitalists is high. This may only be beneficial when you need the funds for a new business venture. The Role of Private Equity After the above comparison of angel investor and venture capitalist, a quick definition of private equity is important to address grey areas and possible similarities. Private Equity Definition Private equity refers to funds that are mainly interested in acquiring private companies not yet listed on the stock exchange. Private equity funds usually have high-net-worth or accredited individuals and firms coming together to pool capital towards investment. Entry into these funds is exclusive due to the large sums required. For example, the minimum entry requirement for some funds is $250,000. Once the required capital is raised, the fund is closed. Angel vs. Private Equity The key similarity between angel investors and private equity is that they have the same goal of investing in a business to get returns. They may do so because they believe in the potential the business possesses, wish to gain control of it, or to save it from failing.  On the other hand, the major difference between the two types of investors is that the angel is an individual who invests on a smaller scale, while a private equity investor usually does so on a larger scale. The intention of a private equity investor is also geared toward acquiring the entity to be invested in. Venture Capitalist vs. Private Equity The objective that both venture capitalist and private equity have is the same - to get returns. Private equity investors, however, are more interested in larger enterprises and companies that are well established. As discussed in this article, venture capitalists are open to investing in startups and businesses that show growth potential. Moreover, venture capitalists are known to narrow their investment scope to tech and science-inclined companies, but this is not the case with private equity investors who prefer diverse portfolios. The sizes of their investments also differ, with private equity investments being higher. Final Thoughts  Regardless of your preferred capital raising strategy, if you’re a business or startup owner, you should explore the benefits provided by venture capitalists vs. angel investors. Even though both classes of investors can help you grow your business, you need to weigh the pros and cons to determine which one is optimal for your company. The amount of capital required is also an important factor to be considered because the investment scopes of these classes differ.   No matter the class of investor you need to approach, be sure to conduct due diligence and prepare an impactful business plan that will increase your chances of securing the investment you need.

Unlevered free cash flow is a term used in corporate finance and investment analysis to discern a company's value. It is the amount of cash a company generates after deducting interest payments, income taxes, and other expenses. This metric is important for business owners and investors alike, as it can be used to make informed decisions about a business or investment opportunity. So, let's explore unlevered free cash flow in more detail and discuss how you can use it to assess a company or individual investment portfolio. We’ll also look at some of the key considerations when assessing this metric and potential pitfalls associated with using it to assess the enterprise value of a business. So, What Is Unlevered Free Cash Flow (UFCF)? This type of free cash flow measures a company's ability to generate cash flow from operations. It is calculated by subtracting a company's interest payments and income tax payments from its operating cash flow. This metric is often represented on the company's financial statements, but analysts also calculate this enterprise value manually. Unlevered free cash flow is important for business owners and investors alike because a cash flow statement indicates a company's ability to generate cash flow after meeting its financial obligations. How Is Unlevered Cash Flow Calculated? The unlevered free cash flow formula is: Unlevered cash flow = operating cash flow - interest payments - income tax payments The formula for calculating unlevered cash flow considers earnings before interest, taxes, depreciation, and amortization, which is known as EBITDA, and investments in buildings, equipment, or machines, also known as CAPEX. The math will also include inventory, accounts receivable, and accounts payable to calculate the net operating profit. Levered vs Unlevered Free Cash Flow When calculating free cash flow to find out how much capital your business could use for growth or whether a business is worth investing in, it's important to differentiate between levered free cash flow and unlevered free cash flow. Levered free cash flow measures a company's ability to generate cash flow after meeting its financial obligations. This includes debt obligations, operating expenses, and capital expenditures. On the other hand, unlevered free cash flow measures a company's ability to generate cash flow from operations. While both unlevered and levered free cash flow are important, the first is often used as a more accurate measure of a company's true cash-generating potential. This is because it excludes the impact of debt on a company's cash flow. What Can Unlevered Free Cash Flow Tell Us About the Company? Unlevered free cash flow can be used to make informed decisions about a business or investment opportunity by evaluating the company's ability to generate cash flow. Whether or not a company presents unlevered vs levered free cash flow on its income statement can make all the difference for investors. A company that is highly leveraged by debt may be more inclined to report unlevered flows on its cash flow statement. This way, the company ignores its debt and provides a less realistic and more positive overview of its working capital to its potential investors. It’s advisable for investors to check the amount of debt weighing the company down before investing. In particular, they should seek information on the overall free cash flow margin and not rely solely on the numbers presented as unlevered free cash flow. The difference between levered and unlevered can also be an important indicator of a company's expenses, financial obligations, and the debt it might be in. Occasionally, the levered free cash flow could be negative - in this instance, the company owes more than it earns, which you wouldn’t be able to tell simply by looking at its unlevered free cash flow. If the difference between unlevered and levered free cash flow is too small, this could also indicate that the company is barely getting by. When you calculate unlevered free cash flow and compare it to levered free cash flow, it’s an indicator that companies with a small difference between the two could easily go under if there’s a sudden drop in their revenue. Potential Pitfalls of Using Free Cash Flow as an Analytical Tool There are a few potential pitfalls associated with using unlevered free cash flow as an analytical tool. First, it is important to remember that the unlevered free cash flow formula does not take into account a company's capital structure, and some companies may take advantage of this fact when presenting their financials. This means that a company with a high level of debt may appear to have a higher net present value than it actually does. Furthermore, companies themselves can manipulate the unlevered free cash flow metric for their financial statement. For instance, a company could choose to defer or prepay certain expenses, such as loan payments, to make itself look better. It could also fire employees or postpone capital-intensive projects to tweak its unlevered free cash flow. Bottom Line Despite its pitfalls, unlevered free cash flow can be an excellent measure of a company's ability to generate free cash flow after interest and taxes. It is important for business owners and investors alike, as it can be used to make informed decisions about a business or investment opportunity. It can be used to assess the financial health of a company and the potential return on investment. However, there are some key considerations to keep in mind when assessing unlevered free cash flow, such as the projection period over which the cash flow is being generated and the company's capital structure. Altogether, when unlevered free cash flow working capital is combined with other metrics like levered free cash flow, it can be a great indicator of whether a company could be a good investment or not. Further Reading: How To Find Angel Investors and Kick-Start Your Business Everything You Need to Know About Investment Banking Digital Asset Management Software Best Bank for Small Business Franchises Under 10k - Affordable Franchises To Invest In

Every business owner hopes that their business is sustainable and can grow. While expansion from an LLC to a corporation isn’t the end goal of most owners, it’s a sign that the company is growing. For one thing, incorporation gives businesses access to more funding from external sources. Incorporating an LLC is no small task, but not to worry; we’ve got all you’ll need to know covered in this guide.  LLC vs. Corporation First, let’s make a distinction between limited liability companies and corporations. Limited Liability Company A limited liability company is one of the most common options for small business owners. That’s because it offers protection from liability, is flexible to manage, and also gives great tax advantages. Such a company exists as a legal business entity, separate from the affairs of its owner, hence the name - limited liability company. This means that LLC owners cannot be held liable for any debts or liabilities related to the business. Personal properties are unaffected in the event of bankruptcy, which is a pretty substantial advantage, especially with how volatile going into business can be. LLCs are straightforward with their structuring, which can make business operations smoother. Another simple-structured option is a DBA, also known as Doing Business As. It’s a side conversation, but be careful not to mix them up. As similar as they may be, DBA vs. LLC comparisons will show you just how different they can be. Let’s talk about taxes for a moment. Operating an LLC means you get pass-through taxation, which means that tax is not levied at the entity level. Income or losses made by the LLC are passed through to the owner. The owners must then report these on their personal tax returns and make any necessary tax payments.  If there is more than one person running the business, a tax return must be completed.  LLC tax benefits are just one reason to open this type of company. Other advantages of an LLC are raising credibility (an LLC is more likely to be considered trustworthy than a partnership or sole proprietorship) and having limited compliance requirements.  Putting LLCs one up in the sole proprietorship vs. LLC debates, limited liability companies do not have to endure the strict compliance requirements that sole proprietorships and other business types (general partnerships and even corporations) face.  On the flip side, however, the disadvantages of an LLC cannot be ignored, either. For one, this type of company generally costs more to establish and run. In some states, you will have to pay an initial formation fee, and many others charge annual report fees, franchise tax fees, or other levies. Additionally, transferring ownership of a limited liability company is tough work. It is usually seamless only when all the members agree to add new members or alter how much each owner has. LLCs also have a hard time getting credit facilities from banks and other financial institutions, and when they do, they are usually secured with personal wealth as a guarantee. Corporation Creating an LLC might be simpler, but corporations also have their advantages. You can choose to form either of the two corporation types; a C corporation or an S corporation.  S corporations are pass-through entities, so establishing them isn’t that much different from forming an LLC. S corporation owners are taxed on the corporation’s profits and losses. On the other hand, C corporations are taxed at the corporate level, meaning the tax accrued is corporate income tax, separate from the business’s owners.  Advantages of Running a Corporation C corporations are the most popular corporation types. This is because they have the distinct advantage of profits remaining within the business, eventually being paid out as dividends to the shareholders. Raising capital under a C corporation is also somewhat easier, as they can issue shares to public buyers. Another advantage of corporations has to do with excess profits. There is more flexibility with the extra profit made by corporations, as opposed to the LLC business model. All the income earned in a limited liability company goes back to the owners but in S corporations, income (and losses) are passed on to shareholders, who will then report it in their individual tax returns. This means that S corporations do not pay corporate tax, meaning they have fewer expenses and can save more money (for context, corporate taxes are usually higher than ordinary taxes). As a bonus, if the corporation can meet some regulations, dividends paid are also tax-free. Disadvantages Corporations are not without their disadvantages. C corps face double taxation, as they are also required by law to remit a portion of their income as federal corporate tax annually. That’s another deduction from shareholders' earnings.  While having a good structure is great, it also comes with many formalities. To run a corporation legally, you must have an appointed board of directors, and schedule and hold board and shareholders’ meetings, among other structural and managerial requirements. In a nutshell, incorporating means spending more on expenses. Steps to Incorporating an LLC Before we dive in, if being taxed as a corporation is what you seek for your limited liability company, then there is a way to go about that without needing to incorporate. Incorporating LLCs can be tricky, and there is no reason to do it if all you seek are tax benefits.  Just file an IRS Form 8832 or IRS Form 2553, and your business will receive tax status as a C corporation or S corporation, respectively. If incorporation is truly your end goal, however, then there are two ways to achieve this conversion: Statutory merger Statutory conversion Incorporating an LLC through a Statutory Merger Statutory mergers are especially useful when an LLC operates in a state like Arizona, which prohibits the other method of incorporation; statutory conversion. To convert by statutory merger, your LLC would need to: 1. Form a New Corporation Becoming an LLC with full incorporation status would require the creation of a new corporation. You would have to file a Certificate of Incorporation to the Secretary of State. 2. Merge the New Corporation and the LLC Together Next, you should begin a merger process between this new corporation and the LLC. As the LLC is absorbed into the company, ownership percentages are converted into shares in the new corporation. Incorporating an LLC through Statutory Conversion Using statutory conversion to make your business an LLC with corporation status is the easiest incorporation method. However, as mentioned earlier, some state laws do not allow it. In the states where it is not prohibited (say, California), the process isn’t always the same but does follow a similar pattern. To incorporate an LLC using statutory conversion, the owners must: 1. Unanimously Agree To Incorporate There has to be a mutually agreed-upon plan for the incorporation. All members should typically be on board with the decision to incorporate the LLC, or it will not be a smooth conversion. 2. File a Certificate of Conversion to the State Next, you must file a certificate of conversion to the state and other documentation such as the articles of organization of the LLC. 3. Issue out Shares to the Public Issuing shares is the next step. As mentioned earlier, all ownership percentages will be converted into shares. This enables the business to issue shares to investors and the general public. Once the conversion is completed, the limited liability company is dissolved and is now a corporation. Incorporating an LLC is challenging, but it can be made easier by getting a company that can help you with your LLC. Besides setting up an LLC and helping save you resources, LLC services can help you avoid mistakes while preparing and submitting your paperwork. What Happens if I Can’t Incorporate My LLC? It is a very rare occurrence, but if you fall under the category of LLCs that can’t be incorporated either by statutory conversion or merger, you may have to use a different tactic. This alternative method is called a non-statutory conversion. Being the last resort, though, it is a very complex process. You should contact the services of an experienced tax lawyer. What Will Happen After an LLC Is Incorporated? Now that your LLC is incorporated, what changes? Here’s what you should expect with the incorporation: A board of directors will be appointed. A certificate of incorporation will be submitted to the state. Business operations will adopt corporate bylaws. Annual board meetings and annual shareholders’ meetings will be held to make resolutions to key decisions. Meeting minutes will also be taken. Stock certificates will be issued to shareholders. The business will start paying corporate tax. Annual reports will be filed with the Secretary of State. Reports vary by state, but you can expect to include the company’s name and address, details of directors and officers, tax identification, business purpose, number of issued shares, and all authorized signatories or registered agents. Again, enlisting the help of a capable LLC service makes all these new processes and changes easier to get through, so unless you know what you’re doing, it’s highly advised to get one.