InvestSMART

Cashflow key to funding investment

BEFORE Michael decides on the investment suitability of a particular business venture he needs to determine how much he can afford and is willing to invest. Consideration must also be given to the cashflow needed to support the business venture and the funding of the purchase price or set-up costs.

BEFORE Michael decides on the investment suitability of a particular business venture he needs to determine how much he can afford and is willing to invest. Consideration must also be given to the cashflow needed to support the business venture and the funding of the purchase price or set-up costs.

At present, Michael's income appears to cover his outgoings for living expenses and loan repayments. This means that there are no significant amounts available from his cashflow to assist with the repayment of any further loans arranged for the purchase of a business venture unless he changes his existing investment property loan to interest only. This would release $18,500 per annum to repay additional borrowings.

Michael's current net assets, excluding his own home and superannuation, total just over $1 million. To enable an investment in a business venture, he would either need to sell some investments or borrow further amounts against his assets. The extent of the rearrangement would depend on the capital needed to buy or fund the business venture.

Caution is recommended as investing in business ventures in the small-business sector have a high failure rate. Michael is highly likely to be increasing his investment risk and reducing investment diversification if he sells down existing assets or borrows to fund the business venture. Should he decide to borrow to fund the business venture, he needs to closely look at the expected cashflows as many business ventures are not cashflow positive initially and, hence, require extra capital from owners.

Suzanne Haddan

Director,

BFG Financial Services


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