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From KC Truby Lonesome Cowboy Publishing Inc. 301 Thelma Drive #426, Casper WY 82609 (760) 207-6385

What is a Business Owner’s Discretionary Cash Flow ?

By on June 14, 2014

From time to time we find articles written by others that we like so much we are posting them here for your use.   William Bruce is a business broker – his contact details are listed below.


By William Bruce

What is a company’s discretionary cash flow, also sometimes referred to as seller’s discretionary earnings?

It is NOT the profit or loss that you show Uncle Sam on your tax return. To put it delicately, almost all business owners run some expenses through the business that are not — a’hem – absolutely necessary to the operation of the business.

Discretionary cash flow is the total cash that the business generates in a year that is available to the owner after deductions for only the necessary operating expenses.  Another way to define discretionary cash flow is that it is the “total owner’s benefit” derived from owning the business, regardless of how the owner takes the money out of the business.

More formally, it is the amount of cash left over after paying only the necessary operating  expenses that is available for (1) owner’s remuneration, including “benefits,” (2) return on investment and (3) debt service, if any.

To illustrate, let me tell you about the sale of a restaurant that I handled as a business broker several years ago.  The profit and loss statement from the business was actually showing a small loss.

However, the owner’s wife drove a Lincoln Navigator which was listed on the books of the business as a company vehicle. The company also paid for all her gas and maintenance on the Navigator although she had no role in the operation of the restaurant.  Same for the daughter’s Honda which she drove back and forth to college. The daughter was also on the payroll as an employee of the restaurant which furnished her with spending money at college, although she never actually worked at the restaurant.

The family’s ski vacation to Colorado was charged to the business because the owner attended a business meeting for a few hours while in Aspen. You see where I’m heading here, don’t you? By the time all these items plus any non-cash expenses (eg: depreciation) were accounted for, the restaurant was actually producing a nice yearly cash flow for the family.

DISCLAIMER: Hey, I’m not with the IRS and don’t render an opinion on these sort of things!

CPAs and business brokers often refer to the computation of discretionary cash flow as normalizing or recasting the company’s profit and loss statement.

Why is the computation of discretionary cash flow important?

It provides an accurate picture of the true cash producing ability of the business.  In effect, it uncamoflages the bookkeeping practices of most business owners.

And since many business appraisals are done based on the company’s discretionary cash flow, it’s important to be able to accurately compute the number.

If I can help with any questions or computations on this subject, don’t hesitate to contact me.

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William Bruce is an Accredited Business Broker and Appraiser assisting buyers and sellers of privately held businesses in the transfer of ownership.  His practice includes consulting services nationwide to business owners and buyers.


His article on how to analyze a business that you may be interested in buying can be read by clicking here.  He may be reached at (251) 990-5934 or by email at


About KC Truby

From their ranch in Wyoming, KC and his wife Linnea have bought or started 21 companies as a side line to their accounting business leading them into M&A as a full time business in 2012. These companies are located all over the Western Rocky Mountains, London and India. Since 1969 through their accounting and training companies, KC has taught 18,000 business owners how to improve cash flow and find more customers by installing standardized systems in their small business. Since 1989 KC has presented over 1,000 seminars and training classes to the small business owner.


  1. Allan

    June 23, 2014 at 7:32 pm

    Are these earnings added back in full to the purchase price of the company?

  2. KC Truby

    June 29, 2014 at 1:44 am

    They are added back into the ‘income’ from the business. The purchase price of the company is based on a multiple of past income.

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