What is Cash Flow in a Business Sale?

When going through with a business sale, people want to know exactly what they are getting themselves into. They want to make certain all their bases are covered and that they have a clear understanding of what stands as cash flow in a business sale. A cash flow budget highlights the sales and revenue, development expenses, the cost of goods, capital requirements and operating costs.

Breaking Down Cash Flow

 

  • Cash Flow Projections

To develop your cash flow, begin by breaking down proposed sales over the next year according to the percentage of business generated for each month. Separate each month’s sales according to cash sales and credit sales. Cash transactions can be recorded in the cash flow statement in the same month they are made. Credit transactions are not credit card sales that are accepted as cash, but rather invoiced sales with agreed-upon terms.

  • Other Income

Other income applies to any revenue received from investments, interest on loans that have been spread, and the liquidation of any assets. Total revenue is the total of cash sales, receivables, and other income. The first month of your cash budget will usually include cash sales, other income and any receivables from the past budget.

  • Cost of Goods and Direct Labor

To retail the product, you must first create it. Since you’ve now broken down sales by month, you must decide the cost of material and labor to generate those turnovers. Define how much direct labor is for the year to build your merchandise. Divide that amount by the percentage analysis of sales. Direct labor gets logged within cash flow as the same month in which it is accumulated.

  • Material Costs

You need to incorporate the material cost in cash flow using a time span that enables you to turn the cost of raw material in cash flow, into finished goods for sale. Thus, if it needs 60 days to turn raw material into finished goods, and your payable period is 30 days following delivery, then enter the cost of assets below material in cash flow 30 days before sales are recorded.

 

  • Working Capital

All personnel and overhead costs are related to sales. You can estimate your working capital and payroll qualifications by dividing marketing and sales, general and administrative, and overhead costs by the entire amount of projected operating. Divide that total by the percentage breakdown of sales for each month and apply that amount to the corresponding line items in the cash flow statement.

  • Capital Equipment Costs

If you can sustain additional debt or buy the equipment from operating expenses, then it’s beneficial to have the material ordered and installed at the beginning of the business year or quarter closest to the time when you will need the equipment. If cash flow is tight, then you might want to wait and buy and install the material at a point in the year when you have guaranteed cash flow.

  • Taxes and Debt

These figures are readily accessible on loan schedules and tax charts used to project these costs. Once all these expenses have been recorded in the cash flow budget, total them up to produce total expenditures. When total spending is subtracted from total income, the outcome is your cash flow. If it’s a shortage, define the smallest cash balance you wish to have, then determine the discrepancy between the minimum cash balance and the cash-flow shortfall. This result is the amount needed for financing purposes.

When creating a cash-flow budget, any amounts financed in a given month must be incorporated in the cash flow under a projected repayment plan. If you’re looking for a professional to discuss the right type of financing for your business sale or business purchase, contact Sunbelt Business Brokers of West Palm Beach. Our brokers have the industry knowledge and expertise to help you sell or buy a business using the financing option that best suits you.

Related reads:

Stay Up-to-Date on The Latest
Subscribe to our newsletter and never miss our latest news.

"*" indicates required fields

Select your subscription list
This field is for validation purposes and should be left unchanged.