Investment is the purchase of capital or productive assets, such as machinery and business premises. The aim of such expenditure is to enable the production of goods or services that will generate future cash flow and profits for the business. These capital purchases will have a negative impact on a firm’s cash flow position in the short term, as they represent cash outflows.
The cash flow implications of investment will differ as firms move through their life cycles and as they grow. For start-up businesses, without existing financial reserves, investment comes with a high risk of insolvency. There are no guarantees that customers will buy sufficient goods and services to cover the initial costs and then provide a future profit. Cash flow may remain negative and finance providers may require repayments that the firms cannot fund. The consequence of such liquidity problems is the failure of many small firms in their first few years of operation.
For established firms, there may be sufficient cash from sales revenue or from cash reserves to cover investment costs, especially where firms are achieving high profit levels.
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