Crazy how some sellers get confused by GROSS numbers they are pulling in

[David S]

When buying any business, the more you understand about ALL the numbers, the better off you are. Both gross and net numbers can hide both threats and opportunities. Net profits tell you how much was left after expenses, but without knowing what the expenses are, it is nearly impossible to know if they can be improved.`` Cash flow is important too, although in most small businesses, cash flow and net income are fairly similar except for debt service. If a seller has debts where he is paying off principal (reducing his cash flow), it usually has no impact on the buyer of the business because the debt is rarely assumed by the buyer.

[akirk]

Arrived at by "starting with your net (before tax) profit. Then, add back in any payments made to the owner, interest and any depreciation of assets." For example, if the net profit before taxes was $100,000 and the owner was paid $70,000 then the cash flow is $170,000.

hmmm - if that is BizBuySell's understanding of accounts it is worrying
net profit is after tax, not before tax...
Wikipedia has a good summary:

Sales Revenue = Price (of product) X Quantity Sold
Gross profit = sales revenue – cost of sales and other direct costs
Operating profit (EBIT, earnings before interest and taxes) = Gross profit – overheads and other indirect costs
Pretax Profit (EBT, earnings before taxes) = operating profit – one off items and redundancy payments, staff restructuring – interest payable
Net profit= Pre-tax profit – tax
Retained earnings = Profit after tax – Dividends

Basically Net Profit is the money left in the pot after everyone outside the business ownership has had their share (salaries / overheads / expenses / costs of goods / taxes / etc.)
That pot can then be left in the business (retained earnings) or taken out - dividends...

Cash flow is the movement of cash in a business...
a business which has turnover of $10 million & profits of $1 million a year is great, but if its cash flow means that $9.9 million comes in on Dec 29th - the business won't be able to pay its monthly bills such as salary / overheads / etc. and will go bust!
Equally a business can have costs of $1 million a month, income of $1 millioin a month - cash flow is fine, but there is no profit.

For a small business - more go under due to bad cash flow than due to low / no profits...

I can see where BizBuySell are coming from - you need to understand not only the money left in the pot at the end of the year, but the amount the owner has taken out - as you could choose to take out more or less... but its definitons are totally off the wall

Alasdair

[Kay]

For a small business - more go under due to bad cash flow than due to low / no profits...

Where's my soap box and why is that so difficult for some people to understand? Shout it from the rooftops and they still don't get it. They really don't. What is so hard to understand about your ins have to match your outs? I've banged my head against a brick wall for years trying to explain that to some people, but they never got it.

[Chabrenas]

And that reminds me, of a personal favorite of mine - a highly recommended read when doing due diligence.

How to Lie With Statistics
http://www.amazon.com/How-Lie-Statis.../dp/0393310728

Should be required reading for everyone that can understand it, not just people interested in business. Which edition have we reached now?

[eddiebooth]

Not understanding cash flow is particularly dangerous when we are coming out of a recession. Companies start spending money on stock/new staff/equipment etc before thay have got paid for the goods/services they already sold and if that money is very slow coming in, or never arrives at all, your business can go down the pan regardless of how much product you sell and how high the profit margins are.

[Kay]

Eddie, I agree. But how can such a simple concept be so hard for some people to understand? You need enough ins to cover your outs. How could it be more simple than that? Yet people burble on about how much investment... All we need to know is do you have enough coming in to pay your bills? Oh, crikey. Don't set me off down that path again.