In our Value Builder series we explore the eight key factors potential buyers review when looking to acquire a business- maybe yours!
The Impact Cash Flow Has On Valuation
“Rule No.1: Never lose money. Rule No.2: Never forget rule No.1”
– Warren Buffet, Investor
It is evident that revenue and profits are an important factor in your company’s value, but many business owners are unaware of the role cash flow plays on their company’s valuation. Your cash flow is different than profits because it measures the cash coming in and out of your business rather than an accounting interpretation of your profit and loss.
Your cash flow, gross margin and profitability have a significant impact on the value of your company. Imagine a playground teeter-totter that can move in only two directions: when one end goes down, the other must go up. The same is true of the value of your company as it relates to your cash flow: the more cash a purchaser must inject into your company when taking it over, the less the purchaser might pay for it. The inverse is also true: the less cash that must be deposited into your business, the more the purchaser will pay.
The goal is to create a business that accumulates cash as it grows. One way to do this is to create a positive cash-flow cycle by getting customers to pay you sooner while you lengthen the time it takes you to pay your expenses. When your customers delay payments, they’re using your cash. You need to ensure you’re being diligent in collecting from your customers.
If you’re uncertain about the progress of your company’s cash flow, consider these questions:
If you bill your customers in instalments, could you charge them a greater percentage of the overall price up front?
Could you evolve your business into a subscription or membership model in which you bill customers before they receive the benefits of their membership or subscription?
If you sell a service, could you do more to “productize” your offer and thereby make it easier to charge up front?
Could you reduce the amount of inventory you pay for in advance of needing it?
Could you lengthen the time it takes to pay some vendors?
Remember that your company can have a profitable business, but a negative cash flow. In addition to maximizing your overall profitability, having money in the bank makes running your business that much more enjoyable before you sell.
A complimentary Value Builder questionnaire available from The Osborne Group will provide an assessment of the current potential sales value of your company. The questionnaire is part of a system developed by internationally recognized small business expert John Warrillow with results based on findings from over 17,000 companies. Your answers will help determine what drives up, or undermines, your company’s value and steps you could take to increase its value.
The questionnaire takes just 15 minutes to complete online and generates a detailed report that an Osborne Group Certified Value Builder consultant will review with you during a complimentary two-hour meeting.
In future blogs, we’ll examine other Value Builder factors and their impact on your company’s worth. Follow us here for the series:
