How to Determine Your Business Cash Flow According to The Bank

Business owners are often confused when a bank turns them down for a loan because their cash flow isn't strong enough. Use this simple formula to understand your business's financial picture through the bank's eyes.

Difficulty: Moderately Challenging

Instructions

Things You'll Need:

• Paper
• Pencil/Pen
• Calculator
• Business & Personal Tax Returns

1. Add up all of your monthly personal debts such as mortgage payments, car loans, rent, etc. Take that total and multiply it by 12. Label that "personal debt".

2. Add up all of your monthly business debts such as mortgage payments, car loans, rent, etc. Take that total and multiply it by 12. Label that "business debt"

3. Take the net income from your business tax return, add back interest, depreciation and amortization. Label that "business income".

4. Take the total personal income from your personal return. Label that "personal income".

5. Add "personal income" to "business income" and subtract the "tax you owe" from the tax returns. Personal tax is found on page 2, business tax on page one (only for corporation, otherwise no business tax). Label this "total cash sources".

6. Add "personal debt" to "business debt", label this "total debts".

7. Divide "total cash sources" by "total debts", this will give you the cash flow your business generates. If the cash flow is over 1, then you have positive cash flow. Under 1 is negative cash flow.

Tips & Warnings

• Significant one-time expenses such as repairs should be added back along with interest, etc.
• It is better to overestimate than underestimate your debt.
• Anticipate changes to your debt expense. For example if you will be buying a new piece of a equipment with a credit card, increase the monthly payment appropriately.
• State taxes should also be deducted for more accuracy.
• This analysis does not include living expense such as food, tuition, etc. So although cash flow could be over 1 using the formula above, other expenses need to be taken into account.
• This is only for informative purposes, different banks use different methods to qualify borrowers.