KNOWING
&GROWING
The
Why Knowing Your Cash Flow
Is Key To Growing Business Value
By Brad Martyn,
managing partner,
FocusCFO
M
eet Ron. On all accounts, Ron appears to be a successful business owner who has
managed his own business for 30 years. He’s enjoyed working for himself and has a
passion for serving clients. But Ron is ready to retire. Ready to sell his business and
enjoy time with his growing family. And what Ron doesn’t know is that the value of his business
isn’t nearly what he thought.
How could Ron be so off in his estimates for his business’s value? For starters, Ron probably
didn’t have a clear picture of his business’s true cash flow and how cash flow impacts the value
of a business.
The truth is, Ron’s not alone – many business owners don’t understand their company’s cash
flow – or its importance. They don’t have a real grasp on the money coming in and going out.
And that can be a real problem when it comes to valuing or selling their business.
By Tim McDaniel,
CPA/ABV, ASA,
CBA, director of
business valuations
(Dublin office)
Simply generating more revenue isn’t enough to increase your business’s value. For buyers,
cash is king. When someone purchases a business, they’re essentially buying a future stream
of cash. It’s only a good investment if they are confident about how much money it will generate
in the future.
So how well do you know your business’s cash flow? If your answer is “not well,” then read on
to learn what you can do to effectively monitor and increase your business’s value.
Ingredients of Cash Flow
READ PART 1 OF
THIS SERIES HERE:
www.knowandgrow.com/
Rea-Report-series
Most accounting systems don’t provide cash flow information – at least not accurately. Owners
usually see net profits, but that doesn’t translate into cash. Quite often, there’s a real disconnect
between operating results and actual cash flow.
In order to effectively track your cash flow, you should identify a series of metrics – what generates cash and what uses it. Start with these:
1. Accounts receivable – Cash loves to hide in unpaid bills. Consider all of the cash you would
have if your customers paid you on time, every time.
2. Inventory – Is your inventory a cash generator, or a cash hog? Analyze this closely – will you
sell all of your inventory, or will it just collect dust on the shelf?
3. Equipment upgrades – Is your equipment obsolete or in need of repair? Equipment is often
overlooked and business owners don’t usually realize how equipment upgrades – or lack
thereof – affect the cash flow of their business.
4. Customers – Are there customers you simply don’t make any money on? It’s possible that
you’ll need to stop serving certain customers if they are a burden on your cash flow.
5. Products – In terms of cash flow, products are similar to customers. If you’re selling a
product for less than the cost to make it, it’s time for a change – either by improving your
processes, or by saying goodbye to that product.
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