What is Cash Flow Business Valuation?

A cash-flow business valuation provides industry data and information on business operations and on incoming revenue and outgoing payments expenses. A cash-flow business valuation can be conducted by a business analyst, financial planner or other financial professional who reviews key financial statements and creates a formal report.

Significance

A cash-flow business valuation allows a business to identify its cash flow and recognize any limitations. A cash-flow business valuations are often conducted by business appraisers who need to identify a business's profit potential, review assets and calculate eligibility for a loan. Cash-flow information is obtained through accounting records and tracking a business's financial reports; it is the evaluation of all earnings before interest, taxes, depreciation, and amortization (EBITDA).

Function

A cash-flow business valuation serves as a written document and overview of a business's financial status over a set period of time. Cash flow is the stream of revenue or expenses that affect the amount of cash on hand. It is an analysis of money outside any financial investments, equity or debt capital, and is also known as the net operating income of a business, minus any debts.

Effects

A history of positive annual cash flow can be attractive for investors and lenders who want to serve as stakeholders in a business over a period of time, while a history of negative cash flow can hinder a business's ability to grow. A cash-flow business valuation can identify trends in income and expenses, and also gauge the company's financial strength at any given time. Ultimately, this helps determine which companies can bring in enough money to cover expenses, and which companies are prone to debt.

Considerations

Cash flow is not the same as the profitability of a business, but does provide some indication of a business's ability to handle money and allocate financial resources effectively. Cash-flow valuation calculators allow business appraisers and other financial professionals to calculate the actual value of a business by analyzing expected business sales and factoring in a discount rate.

Benefits

A cash-flow valuation is most valuable for companies that have large up-front capital expenditures and need an accurate assessment of whether they are creating positive earnings. Since the cash-flow valuation takes out the factors of depreciation, interest and amortization of start-up capital costs, the assessment will provide a more realistic picture of how effectively the company is generating cash.