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.
LA's Small Business Bookkeeper
The Next Step:
A Short Conversation
Tell us about your business and what you're dealing with. We'll listen, ask a few questions, and give you a clear price for the work.
More Questions
What does due diligence look like for selling a small business?
Due diligence is the buyer's verification process where they examine your financials, contracts, operations, and legal standing. Expect requests for 2-3 years of tax returns, profit and loss statements, customer data, and employee information.
Read answerWhat bookkeeping records do I need to keep as a real estate agent?
Keep commission statements, mileage logs, marketing receipts, professional dues documentation, and all business expense receipts. Vehicle mileage is especially important since agents drive constantly for showings and client meetings.
Read answerHow do I track retainer fees and earned income for my law practice?
Retainers go into your IOLTA trust account as a liability until earned. When you bill time against the retainer and transfer funds to operating, that becomes revenue. The tracking requires separate accounts and monthly reconciliation.
Read answerWhat documents do I need to provide for bookkeeping catch-up?
Bank and credit card statements are the most important documents for catch-up bookkeeping. Beyond that, gather invoices, receipts, loan documents, and payroll records if you have them. Most bookkeepers can work with incomplete records as long as the bank statements are complete.
Read answerHow do I calculate food cost percentage for my restaurant?
Divide your food costs by your food sales and multiply by 100. For overall restaurant food cost, you need to calculate cost of goods sold using beginning inventory, purchases, and ending inventory.
Read answerHow do I manage cash flow during slow enrollment periods?
Map your seasonal patterns using historical data, then build cash reserves during peak months to cover three to four months of operating expenses. Time major purchases around your cash flow calendar and adjust variable costs like instructor hours to match actual student demand.
Read answer