What exactly does the term "Cash Flow" mean?
GREAT question!! Cash flow is probably the most frequently misused accounting term I can think of. Cash flow is NOT profit. First understand that "cash flow" as a term for valuations is far more applicable in large business transactions, and not smaller ones where the buyer will be taking over from the former owner.
In its purest form cash flow means: "the amount of cash that the business had at the beginning of a period, what it had at the end of a period, and what happened to the difference."
You're probably going to come across this term during your search to buy a business in numerous locations such as business for sale websites, financial statements, broker listings, etc. It is imperative that you get a breakdown of what is included in this so called "cash flow" number. More than likely, it is not the correct terminology for the figure you will review. What is often referred to as cash flow in small businesses for sale is actually the Seller's Discretionary Cash Flow, Adjusted Income/Profit or Owner Benefit figure. This is typically the total of net income, owner salary, perks, depreciation, interest, and non recurring expenses. (By the way it should also include a provision for capital expenditure allocation but that's a whole different discussion). As you can see there is an enormous difference between what cash flow actually is, and what it is represented as to a buyer.
|Get more expert advice in Richard Parker's How To Buy A Good Business At A Great Price - the most widely
used reference resource and strategy guide for buying a business.
|Richard Parker is the author of: How To Buy A Good Business At A Great Price, the most widely used reference resource and strategy guide for buying a business. He has purchased ten businesses in his career and has helped thousands of prospective buyers worldwide learn how to buy the right business for sale. He is also founder and President of Diomo Corporation - The Business Buyer Resource Center.|