What questions should I ask about a business's cash flow before buying?
When evaluating a business for purchase, cash flow tells you more than reported net income ever will. Profit can look good on paper through accounting choices, but cash either shows up in the bank account or it doesn’t. Here are the questions that reveal whether the cash flow will hold up after you buy.
Ask how cash flow compares to net income over the past three years. If net income is consistently higher than operating cash flow, the business might be booking revenue that hasn’t been collected or using accounting methods that make results look better than reality. Request both cash flow statements and income statements to see the gap.
Ask for monthly cash flow breakdowns, not just annual summaries. A business making most of its money in Q4 might look profitable overall but struggle to cover payroll the other nine months. Understanding seasonality tells you how much working capital you’ll need to survive the slow periods.
Find out how concentrated the customer base is. When 30% or more of revenue comes from one or two customers, you’re buying concentration risk. Ask whether those relationships are tied to the current owner personally. A major customer leaving after the sale can collapse the cash flow you paid for.
Ask about actual owner compensation. Sellers structure pay differently depending on whether they’re minimizing taxes or maximizing sale price. Business purchase analysis typically reconstructs seller discretionary earnings to show what the business actually generates for an owner after accounting for personal expenses run through the company and one-time costs that won’t continue.
Request an accounts receivable aging report. Strong sales mean nothing if customers don’t pay. Receivables over 90 days are often uncollectible. If significant amounts are aged, that cash flow may never materialize.
Ask what capital expenditures have been deferred. Cash flow looks better when you skip maintenance. Find out what equipment needs replacing, what repairs have been postponed, and what upgrades are necessary to stay competitive. Sellers sometimes defer major expenses before a sale, leaving buyers with immediate capital needs the numbers didn’t show.
Understand what payables and liabilities are outstanding. Ask about vendor balances, accrued payroll taxes, pending legal matters, and seasonal payments coming due. You need to know what obligations transfer with the purchase.
Getting straight answers requires verifying bank statements, tax returns, and financial records rather than relying on seller-prepared summaries. For small business bookkeeping in Los Angeles and beyond, the books should reconcile cleanly with deposits and withdrawals. When they don’t, that’s a question worth asking before you sign anything.
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