Cash flow
What it means
Cash flow is the money moving into and out of your business over a period of time. Money comes in from sales and goes out to pay rent, wages, suppliers, taxes and loan payments.
When more comes in than goes out, cash flow is positive and the business is building a cushion. When more goes out than comes in, it's negative and the business is drawing that cushion down.
See also: Average monthly revenue, Average monthly expenses, Existing monthly debt payments
Why lenders ask
Cash flow is the first way a lender expects to be paid back. Before anything else, a lender wants to know whether the business generates enough cash to cover its expenses, make every loan payment, old and new, and still have room to spare.
Cash flow vs. profit
Profit and cash flow are related, but they aren't the same. Profit is what your income statement shows after expenses. Cash flow is what actually lands in, and leaves, your bank account.
The two can drift apart. A sale you've invoiced counts toward profit, but it isn't cash until the customer pays. The principal part of a loan payment uses cash but isn't an expense on your income statement. Depreciation is the reverse: it lowers profit without any cash leaving the business. That's how a profitable business can still run short of cash, and why lenders look at both.
How a lender looks at your cash flow
A lender usually starts from the profit on your year-end financial statements, then adjusts it to get closer to real cash. Expenses that don't use cash, such as depreciation, are added back, along with the interest you already pay, since the question is whether there's enough to make the loan payments. Money the owners take out of the business may be subtracted.
The result is compared with all of the business's loan payments, including the new one. Bankers call this the debt service coverage ratio. They want to see the cash cover the payments with room to spare, because sales dip, costs rise and customers pay late.
No history yet?
A new business shows its cash flow with projections: a realistic forecast of revenue, expenses and loan payments for the first one to three years. A lender will test every assumption behind it, so be ready to explain where each number comes from.
Good to know
Not sure how your cash flow looks? The Loan Ready calculator asks for your monthly revenue, expenses and existing debt payments, then shows how a new loan payment fits.