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?
Month-to-Month Cash Flow
by a searcher from University of California, Los Angeles
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Ultimately if it's a seasonal business, accrual and cash financial reports are important to understand how well they do in-season, and how many of the expenses exist in the off-season. But I'd recommend trying to match revenue with expenses as directly as possible, and some of the seasonality may go away.
2. Often negative earnings can be positive CF month and positive earnings can be a negative CF month. True for businesses with high WC.
3. ^Searchfunder member has given good options. Most buyers (e.g. PE buyers) structure the deal so they have 'availability" to absorb monthly ups/downs. One such approach is to create a WC line at closing but not use it, or not use fully it, to close the deal.