Chapter 6 - Exploring Your Business’s Nerve Center: Cash Flow ,

Abstract

Cash flow is your firm’s lifeblood. It means, literally, cash flowing through a business during the course of a fiscal year. Lenders say that cash flow analysis may be the most important tool in their repertoire, the tool by which commercial and investment bankers evaluate loans and value companies. A cash flow statement will highlight your firm’s activities in a way that an income statement will not. Through cash flow statements, experienced lenders figure out, before they approve an extension or a new facility, how efficiently and profitably customers used prior loans. Without cash flow statements, lenders have an incomplete picture of the business simply because accounting entries alone do not reveal both the degree to which historical and future cash flows cover debt service and borrowers’ chances for survival. Credit-worthy low-volatile operating cash flows point to reduced default probabilities. On the other hand, lenders view weak, unreliable operating cash flow and increasing, elevated default probabilities as two peas in the same pod.