The Impact of Cash Flow on the Value of Your Company
This month, we discuss the tenth of the Value Builders drivers with our focus on cash flow. We call this the TEETER TOTTER. Our goal will be to maximize the cash flow coming from the day-to-day operations of your business. This exercise is anchored by The Cash Flow Finder tool. Once complete, you will have a set of actions to take that will increase your cash flow, minimize, or eliminate stressful periods of low cash flow, and increase the overall value of your company. With this being the goal, here are a few thought-provoking questions:
Thinking of your typical customer relationship, how many days after they decide to buy do you receive their cash?
Thinking of your typical supplier relationship, how many days after you agree to buy are you required to pay?
Cash coming in
- How could you shorten your payment terms?
- How could you be more disciplined about collecting payments? (e.g., invoice faster, identify disputes sooner)?
- How could you get a higher proportion of customers to pay up front with a credit card?
- How could you ask customers to pay a deposit or increase the proportion of the purchase they pay up front?
- How could you create an incentive for prompt payment?
- In what ways could you penalize customers for paying too slowly?
- What other ways could you accelerate the pace at which you get paid?
Cash going out
- How could you negotiate longer payment terms?
- Are there suppliers you currently pay up front that would accept a credit card?
- How could you reduce the amount of inventory you need to carry?
- Is there equipment you buy today that could be borrowed, rented, leased, or shared?
- What other ways could you delay the pace at which you pay suppliers?
Why Cash Flow Matters
Let’s talk more in depth about the impact of cash flow on the value of your company, our teeter totter. We refer to it as such because the value of your company is going to have a direct relationship with how much cash your company throws off. Now I am not talking about cash on a profit and loss statement, I am talking about cash coming into your bank account. The more cash you can get your company generating, the more valuable it is going to be to an acquirer. When a buyer goes to buy your company, they are going to have to write two checks, not just one. We always think about the one check they need to write is the check to you, the owner, to pay for your company. However, there is a second check they need to write, and that second check is for working capital. The money your company needs to operate the moment the new buyer takes over your business, and those two things work in opposite directions. The more cash your company needs to operate, the more working capital the acquirer is going to need to inject into the business when they take over.
Boosting Cash Flow
OK, so you know that the value of your company is going to be impacted by your cash position. The more cash you generate, the more valuable your company will be. Conversely the more working capital needed, the less the business is worth. So, you are going to need to find ways to increase your cash position to have a direct impact on the value of your company. You may be saying “OK, I get that but how do I do that?” Let us focus on ways that you might increase cash coming into your business. I am not intending this to be an exhaustive laundry list for you to go implement today, what we are doing here is trying to give you some ideas to spark your thinking. Let me give you some examples of different ideas, and hopefully one resonates with you. Maybe you are used to asking customers to pay in 30 days. Maybe it is time to get more disciplined about that, can you accept credit cards for all your transactions? We have many Methods for Management (MFM) members who have gone cashless in the past 3 years. NO A/R or runs to the bank. NO more employee “loans” from the change bag – and do not think this does not happen. I went cashless 4 years ago with no push back from clients. It works. Most of the MFM members have gotten away from monthly billings altogether and now charge client cards on order completion. IMAGINE, no delays of collection for your work, no mailed statements, or the time they take to prepare. Your cash flow now is 1 day, not 30 to 60 days. The value of your business just went up dramatically. Yes, we all have those few legacy customers we still bill, but they were never much of an issue.
Slowing Cash Out
Let us say for example you are paying suppliers in 30 days. Is it reasonable to assume that those suppliers will continue to supply you if you stretch them to 45 days? Those fifteen extra days can have a material impact on your cash position. Or do you have suppliers that you can pay by credit card and take a vantage of the 20 days of float you going to have on a credit card? The points are also nice to get. A way that you could be reducing the inventory that you carry is to order more frequently to keep inventory down. BUT in these days, I have recommended MFM members actually increase their supply inventories as none of us know when our next load will appear. We keep a very close eye on our supply reports as I get extremely aggravated when we run out of anything that effects our brand.
One more area of cash flow might be reducing your equipment needs, like that machine that you bought last year. Did you really need to buy it, or is it possible you could have rented it?
For those reading this, if you are using QuickBooks as your accounting platform, you can create a Cash Flow budget. I also highly recommend that every business create and manage to a budget. This identifies variances between budget and actual results. This is your score card and guides your decisions. Without a budget, how in the world do you know how the business is doing? I remember a conversation I had with an operator several years ago regarding knowing your numbers, which is an integral part of our MfM analysis platform. I asked, “How do you know how the business is doing?” He said that he, “looks at his bank account to see what is there.” My reply was “I could play that game to0, by just not paying my bills.” I am tempted to investigate whether he is still in business.
I hope this information shows that the issues related to cash flow could have a significant impact on the value of your company when you go to sell it. So, make sure the working capital calculation is stipulated in any offer to buy your business. Conversely, if you looking to acquire another operation, study the cashflow of the business.
Next month we will talk about developing a concise list of potential acquirers with a strategic reason (and the resources) to buy your company. Whether you want to sell your business in a year or a decade, knowing who the natural buyers are for your business will allow you to look at decisions based on how they might increase or decrease your attractiveness to a buyer. Until then, enjoy building value.
If you are curious as to how well your company is performing in the Value Drivers we have been discussing, get your FREE Value Builders Score TODAY!
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