500 New & Refreshed Posts, Postings Daily
Over 8,000 Postings & 2,500 Resources
Assisting Buyers & Sellers Over 25 Years!

Cash Flow

Tags: adjusted net income, deal structures

Comments & Replies: 2     Views:     Post ID:     Comments About This Glossary Term

"Cash flow" is definitely a term of art that is very important and highly misunderstood. As Craig points out, it has nothing to do with profitability, but rather with liquidity. Remember the mantra: "Cash is king." A competent CPA or financial analyst should employed by both the seller and buyer to determine the strength of the company's cash flow, it's liquidity, because it is an essential component for both the buyer and the seller to determine the value of a business enterprise. I have seen many businesses that were technically solvent because the value of their assets exceed their liabilities; but, because the assets weren't liquid and there wasn't sufficient cash flow, the business went bankrupt.

The term "cash flow" is used interchangeably with other phrases, like "EBITDA," "owner's discretionary earnings" and "owner profit" to mean the amount of money available for personal use by the owner of a small or mid-sized business after all expenses are subtracted from the company's total revenues. It's an expression that is rather imprecise as it refers to a figure that can be calculated various ways.

The term often is heard or read in connection with the examination of a business for sale. The owner/seller or a business intermediary attempting to find a buyer might use the term in connection with a specific amount or as an expression with its general meaning, but without quantifying it.

Usage With A Specific Amount

If a buyer is told the cash flow of a business was $86,500 last year-- an example of the expression of the term in connection with a specific amount - the underlying understanding is that there is a formula by which this figure is calculated. But it's not like EBITDA (earnings before interest, taxes, depreciation and amortization), which describes the amount available for owner use and is determined in a commonly accepted manner. The term 'cash flow' could be calculated several ways. For instance, there are different depreciation and amortization schedules that could be used. And what some owners might consider personal expenses, others will charge against the business. When discussing a specific amount of cash flow, it's important to know exactly how that figure was determined.

Usage As A General Expression

The mention that a business has positive (or negative) cash flow is a general description about its success, without quantifying it. Business intermediaries, as well as buyers and sellers often use the expression 'cash flow' when referring to a factor in the company's performance. In that way, the term is used much like expressions such as "revenues" "gross" and "profitable" to refer to characteristics of the business, but without specifying actual figures.

While the term is useful in explaining the overall characteristics of a business, anyone using or hearing the words "cash flow" needs to understand that it's not necessarily useful if not quantified with a specific amount along with an explanation of precisely what calculation was used to arrive at that amount.

Other Related Blog Posts, Articles, And Discussions You May Be Interested In

Key Factors Play A Role When Selling When To Sell Your Small Business - Many Key Important Factors Play A Part

Determining the right time to sell a private business is as much an art as a science, because there are so many factors at play and each business is unique. The timing of a business sale is critical. Christina Lazuric, CBI, Orange County Business Broker discusses this topic on this BizBen Blog post.
Santa Clara County Sandwich Shop For Sale Santa Clara County, CA With High Annual Cash Flow Sandwich Shop For Sale

Mom and Pop sandwich shop for sale in Santa Clara County, CA. Proven year over year growth. Located in a business high traffic area with lots of easy Parking and located in a great retail sales area. Good books and records. Continued growth. For sale by owner. Walk in, online sales. High cash flow.
Bill Ziprick Transactional Attorney Bill Ziprick, Attorney: Contracts, Negotiations, Closings, And Lease Reviews

Legal services. Through creative problem solving, attention to detail, accessibility, & understanding that unnecessary delay is often a deal killer, I work closely with my clients and other professionals to consistently achieve a high rate of closings. Office: 909-255-8353, Cell: 509-951-7230.
Reason For Not Selling Business What Are Some Possible Reasons My Broker Didn't Sell My Small Business?

What are some reasons a business that was previously on the market with another broker didn't sell? Every broker or agent understands that not every business they list will result in a sale. There can be many reasons small businesses don't sell and many are discussed on this BizBen Discussion post.
Harry Sidhu Business Brokerage Services Harry Sidhu Business Broker - California - SF Bay Area, Central Valley, SAC

Assisting both sellers and buyers of businesses - dealing mainly with Liquor Stores, Grocery Markets, Gas Stations, Smoke Shops, Restaurant Related, Retail Related, Service Related. Serving SF Bay Area, North Bay, Sacramento area. Call Harry Sidhu CBB direct for assistance at 510-366-6130 cell/text.
How Long Is A Standard Non-Compete Agreement? How Long Is A Standard Non-Compete Agreement Between Buyers And Sellers?

For those who don't know, a non-compete agreement is a contract between a buyer and seller of a business, which after the sale, prohibits the seller from engaging in direct competition with the business they previously sold. Joe Ranieri (Business Broker) adds this topic to a BizBen Discussion Post.
8 Tasks To Help Sell Your Contractor Business 8 Tasks To Help Sell Your Construction Or Contractor Business: New Blog Post

Construction & contractor businesses can be difficult to sell. Licensing requirements, technical experience & owner reliance often create obstacles to getting a deal done. Here are 8 things potential sellers can do before putting your business on the market. Brian Loring explains in this blog post.
Buying A Car Wash Small Business Buying A Self-Serve Car Wash Business: What Should My Expectations Be?

Before purchasing a car wash (quick serve or full serve) you must understand that the industry as a whole will provide you with plenty of competition. More importantly, depending on what your interests are, you will identify what type of car wash you want. We discuss this all in this Discussion.
Great Questions To Ask A Seller As A Business Buyer What Questions Should I Ask The Owner, Seller Or Broker?

Asking the seller straightforward questions and getting straightforward answers in return is an important part of the buying and due diligence process. In this Discussion, both ProIntermediaries and Advisors offer thorough questions you should be asking during your meeting with a business seller.
Chuck Post Webinar Buying A Laundry FREE Online Webinar For Laundry Buyers: Weekly Webinar For Laundry Buyers

Chuck Post hosts this live FREE online webinar on Buying A Laundry business. The next online webinar is coming soon. Have your questions ready for an open and honest discussion about both the Pro & Cons of the Vended Laundry Business. RSVP or for more info phone Chuck at 619-227-5711 direct.