Cash Flow From Operations

The cash flow from your business's operations — the cycle of cash flow, from the purchase of inventory through the collection of accounts receivable — is the most important factor for obtaining short-term debt financing. A lender's primary concern is whether your daily operations will generate enough cash to repay the loan. In addition, cash flow shows how your major cash expenditures relate to your major cash sources. This information may give a lender insight into your business's market demand, management competence, business cycles, and any significant changes in the business over time.

While a variety of factors may affect cash flow and a particular lender's evaluation of your business's cash flow numbers, a small community bank might consider an acceptable working cash flow ratio — the amount of available cash at any one time in relationship to debt payments — to be at least 1.15:1.

As most lenders are aware, cash flow also presents the most troubling problem for small businesses, and they will typically require both historic and projected cash flow statements. In preparing cash flow projections for newer businesses, you may want to refer to any one of several sources that publish sales/expense ratios for specific industries. The ratios will help you compute realistic sales revenues and the proportion of expenses typically necessary, in that industry, to generate the projected sales revenue.

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