Month-to-Month Cash Flow
May 16, 2024
by a searcher from University of California, Los Angeles in Orange County, CA, USA
I see a lot of businesses that have great annual cash flow, but fluctuate month-to-month. For example, in February the business profited $50,000, but in March it lost -$4,000. If you're using an SBA loan to acquire a small business, there is a fixed monthly debt that needs to be serviced. If you've freshly acquired a business and haven't built up cash reserves to compensate for these "bad" months (despite the business performing well annually), how do you cover the monthly debt? Or do you avoid businesses with this level of monthly volatility? Where do you draw the line for what's deemed "acceptable" such that you're willing to make an acquisition offer?
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
If the business is truly seasonal where there are always multiple months in a row where cash flow is light, then you can also request a modified payment schedule from your SBA lender. Under such a schedule you would either have no payments or interest only payments during generally slower months. However, this typically only works if it is a true seasonal business with slow months lumped together and not just random months during the year when it is slow.
If you would like to discuss further or need help with a cash flow model, you can reach me here or directly at redacted Good luck.
from Stanford University in Bellevue, WA, USA
This isn't just for seasonal businesses which is really common in areas like e-commerce. We try to do this for every business. There are many other reasons that you can have a cash flow crunch at just the wrong time including fast growing businesses, ones with long payment terms for customers, or low inventory turns businesses.
One example is a software company that signed up customers for multi-year contracts but billed its customers on a monthly basis but paid out commissions to its salesforce on the entire value of the deal almost immediately after closing. As you can imagine, as sales ramped they had significant cash flow issues which no one expected when they put together the sales comp plan.
As long as you can accurately project out the monthly cash flows, volatility by itself isn't a show stopper. It just means you need to put more cash into the business to handle the fluctuations which impacts the price you can pay.