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what is cash flow?, what does it mean for a business?, if my gross sales is 300K and cash flow is 90K.

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Answers (4)
Michelle Orr
Wells Fargo SBA Lending
Business Development Officer
Fairfield County, CT

John,
I agree with the other definitions provided by my colleagues. In short, cash flow is the amount available after adding noncash charges (such as depreciation, interest expense, owner's salary, etc) to net income. I am curious to know why you are asking this question? If it is because you are thinking of selling your business, then the available cash flow to service a loan for a buyer will be very important to the buyer securing financing.
Please let me know if you need to discuss further. You can either call me at 203-345-6118 or email your contact info to morr@orrcommercialcapital.com.

Best regards,
Michelle Orr

Jun 16, 2009
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Small Business Underwriters
Founder

Cash flow means is much money the business generates before repaying debt and lease obligations. It differs from net income in that it eliminates non-cash items such as depreciation & amortization, and other "add-backs" like owners salary and interest expense.

If you don't feel comfortable with reviewing financials, I suggest engaging someone like me to review the financials and note any red flags that may exist.

Jun 16, 2009
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Strategic Endeavors LLC
PA

Cash flow is defined different ways for different purposes, but for selling a small business cash flow is defined as SDE = Sellers Discretionary Earnings. This includes profit/loss from the business, the compensation of one owner, depreciation/amortization, and interest expense. These are the basics but it may include other expenses if they are non-recurring or non-operating. Rent is also an area to consider as the cash flow should be based on a market rent for the premises used by the business. This number is meaningful in that it represents the total dollars an owner of a business has to work with in operating the business. In justifying a selling price, a buyer would expect the SDE cash flow to cover a salary to replace the owner, service the debt on the financed portion of the transaction, fund capital expenditures to keep the cash flow coming in, and have something left over to provide a good return on investment.

Apr 3, 2009
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The BAF Group LLC
MD

It is not that simple. The Cash Flow, or Seller's Discretionary Earnings (SDE), as many Brokers refer to it, is a process of looking at Profit, plus adjustments such as Interest Expense and other expenses that the Buyer would not incur, once he purchases your Business. As an example, Interest Expense on your Tax Returns is something you might have paid on your loan when you bought the Business. But you would pay off that note when you sell the Business. The Buyer may have his own note to pay, but he will not pay yours as well; therefore, in recasting Cash Flow, the Interest you paid is added back to the Cash Flow numbers and used to apply toward any expenses the Buyer might anticipate. There are any number of these kinds of things that can come into the process. To determine that kind of information and provide a Cash Flow-oriented suggested Purchase Price, the Broker needs to look at your last three (3) years of Tax Returns. A weighted average of Cash Flow throughout those periods will provide the basis for pricing, for many small businesses.

Apr 3, 2009

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