If you have historical financial statements, your would-be venture capital investor will take high interest in them. VCs typically look at financial statements differently than other investors, and certainly differently than a lender would.

This three part series will look at the three primary elements: income statement, balance sheet and statement of cashflows. Part one, the income statement can be found here.  This is part two, Statement Of Cashflows

Following scrutiny of the income statement (see Part 1), most investors will settle down with the cashflow statement. Overall, they want to see how capital intensive the business is, i.e. how many dollars have to be put into the business before one pops out.

It’s not that a capital intensive business is necessarily bad, but rather if a business needs lots of money, the equity investor needs to know it, because he or she is the person everyone is going to turn as the business starts to experience growing pains.

For example, when analyzing the cashflow statements for capital intensity, many investors will look for seasonality. Why? Seasonality eats cash because a business carries inventory that it cannot sell, or maintains staff levels that are not optimized.

Another harbinger of capital intensity is lengthy collection periods. If these are combined with overall increases in the volume of receivables, it means that the company is really getting squeezed. In fact, it’s possible for a growth company to be highly profitable, but cashflow negative every month.

While receivables financing from banks would appear to alleviate some of the capital intensity, that’s not always the case. New products, especially those which are technical in nature, there is uncertainty regarding their reliability, and as a result, market acceptance. In addition, services always make for funny receivables because there is no exchange of a physical product — nothing the seller can take back if the buyer fails to pay.

Because of these characteristics, service and growing technology companies often find receivables financing from banks difficult to come. Often times, it’s the equity investor that has to fork over an extra layer of capital so that the operation can catch its breath, hence the focus on capital intensity.