Understanding Cash Flow

Too often, we banker types throw around terms like “cash flow” and “cash flow analysis” as if they were common in everyday conversation. The reality is quite the opposite, and we’re doing our clients a disservice if we don’t take the time to explain what these terms mean and why they are so important to a successful business.

At its core, cash flow is the difference between the money generated by a business (cash inflow) and the cost to run the business (cash outflow). When considering a small business loan, banks commonly go one step further by incorporating personal obligations as part of the cash outflow. A cash-flow analysis measures a company’s financial health and a borrower’s ability to meet their business and personal obligations. It provides the information upon which lending decisions are based.

To better illustrate why it’s important to understand cash flow, let’s review an example that shows how a minor change in a borrower’s obligations can make the difference between a loan being approved or declined.

For this example, we’ll assume that a borrower is purchasing a dental practice that collected $750,000 in 2014. These collections (not production) represent the cash inflow in our cash flow analysis. After deducting all business expenses that will be assumed by the buyer (business cash outflow), the practice showed an operating profit of $247,500 for the year. Business expenses, such as interest payments and auto expenses, are not assumed by the buyer and are therefore not included in the cash flow analysis. This $247,500 is also referred to as the practice’s operating cash flow.

Once we’ve determined the amount of money a borrower can expect to generate from the practice, we factor in the payments on the loan needed to purchase the practice as well as the borrower’s personal obligations. These obligations may include payments for mortgages, student loans, autos, credit cards and taxes as well as a cost of living estimate. In our example, the borrower has total obligations of $200,000 (personal cash outflow).

Now that we’ve accounted for all of the cash inflows and outflows, our cash flow analysis shows that the borrower will have $47,500 in excess of his/her business and personal obligations. To put it another way: for every $1 in business and personal obligations, the borrower will generate $1.24 from the practice. To

approve a loan, many banks require that borrowers generate no less than $1.20 for every $1 in expenses. This borrower was close, but at $1.24, the cash flow analysis resulted in an approval!

But what if the borrower’s expenses were slightly higher? Today, almost all dental students graduate from dental school with a sizeable amount of debt and most are anxious to pay it off. The borrower in the example above chose to pay his/her loans off over 30 years and made annual payments of $48,000. At the time the borrower started repayment, there was a 15-year option at a slightly lower interest rate that required annual payments totaling $72,000. While this alternate option would have saved the borrower some interest, the required larger payment would have reduced the borrower’s excess cash flow by $24,000. This minor change would have resulted in the borrower generating only $1.08 for every dollar of expenses and the loan request would be declined.

We have the financing you need to make it happen.

You can rely on the industry leadership and experience of Bank of America Practice Solutions. We have provided financing for thousands of healthcare professionals and understand the challenges that accompany them. Let us help you. We encourage you to call the experts at Bank of America Practice Solutions to discuss.

Practice acquisition

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• Working capital to help you with the transition
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All programs subject to credit approval and loan amounts are subject to creditworthiness. Some restrictions may apply. The term, amount, interest rate and repayment schedule for your loan, and any product features, including interest rate locks, may vary depending on your creditworthiness and on the type, amount and collateral for your loan. Bank of America may prohibit use of an account to pay off or pay down another Bank of America account. ♥ Bank of America Practice Solutions makes no express or implied warranties with respect to any aspect of the Practice Heartbeat® program, nor does it guaranty any success or promise any results, and hereby disclaims the same to the extent allowed by law. The opinions of Bank of America Practice Solutions are based upon prior experience, and it makes no promise or guaranty that you will achieve any particular measure of success or results by participating in the program. You are not bound by any recommendations provided under this program and retain full responsibility for the results achieved by your professional practice. † Bank of America Practice Solutions engages Scott McDonald & Associates, a national marketing firm specializing in demographic research, site analysis and profile reports for health care professionals to produce a demographic report to assist

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• Up to 100% financing for everything — architectural fees, construction, equipment, cabinetry and more
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