Animal Health Solutions

26 Covetrus | ph: 855.724.3461 | fx: 888.329.3861 | northamerica.covetrus.com At its core, cash flow is the difference between the money generated by a business (cash inflow) and the cost to run the business (cash outflow). When considering a small business loan, banks commonly go one step further by incorporating personal obligations as part of the cash outflow. A cash flow analysis measures a company's financial health and a borrower's ability to meet their business and personal obligations. It provides the information upon which lending decisions are based. To better illustrate why it's important to understand cash flow, let's review an example that shows how a minor change in a borrower's obligations can make the difference between a loan being approved or declined. For this example, we'll assume that a borrower is purchasing a veterinary clinic that collected $1,000,000.00 in 2020. These collections (not production) represent the cash inflow in our cash flow analysis. After deducting all business expenses that will be assumed by the buyer (business cash outflow), the clinic showed an operating profit of $247,500 for the year. Business expenses, such as interest payments and auto expenses, are not assumed by the buyer and are therefore not included in the cash flow analysis. This $247,500 is also referred to as the clinic's operating cash flow. Once we've determined the amount of money a borrower can expect to generate from the clinic, we factor in the payments on the loan needed to purchase the clinic as well as the Cash flow analysis 101 By Jimmy Stern, VP, Regional Business Development Officer, Bank of America Too often, we bankers throw around terms like "cash flow" and "cash flow analysis" as if they were common in everyday conversation. The reality is quite the opposite, and we're doing our clients a disservice if we don't take the time to explain what these terms mean and why they are so important to a successful business. borrower's personal obligations. These obligations may include payments for mortgages, student loans, autos, credit cards, and taxes as well as a cost of living estimate. In our example, the borrower has total obligations of $200,000 (personal cash outflow). Now that we've accounted for all of the cash inflows and outflows, our cash flow analysis shows that the borrower will have $47,500 in excess of his/her business and personal obligations. To put it another way: for every $1 in business and personal obligations, the borrower will generate $1.24 from the clinic. To approve a loan, many banks require that borrowers generate no less than $1.20 for every $1 in expenses. This borrower was close, but at $1.24, the cash flow analysis resulted in an approval!

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