Let's explore the surprising role cash flow has on your business. You've got to maximize the cash flow coming from your day-to-day operations in order to have a highly valuable company, and this video will get you started.
The Valuation Teeter-Totter, just one of the eight value drivers acquirers look for when valuing a business, reflects the impact your cash flow, gross margin, and profitability have 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 an acquirer must inject into your company when taking it over, the less that acquirer will pay for it. The inverse is also true—the less cash your acquirer must deposit into your business, the higher the price he or she will pay.
Balance Your Teeter-Totter
Your goal should be 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. Besides maximizing your overall profitability, having money in the bank makes running your business much more enjoyable before you sell.
The Relationship Between Risk and Return
The price an investor is willing to pay for an asset relates to how risky they perceive the future stream of profits to be; the riskier the investment, the higher the return an investor will demand.
Consider the following:
If you bill your customers in installments, 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 lengthen the time it takes to pay some vendors?
Your Valuation Teeter-Totter is one of eight drivers of your company’s value.
Want to find out how you score on the other seven?
If that's a “Yes,” then carve out 15 minutes and click the button below to get your Score on the Value Builder Assessment. You'll thank yourself later when you see how it can focus your attention on what could work better and build more value in your business.
Julie Edge Ph.D., is chief strategist and founder of Inside Edge Solutions LLC, a boutique strategy coaching and consulting firm serving business owners seeking less chaos and complication in their business and more thriving in their life—both personally and professionally. Connect with Julie on LinkedIn at @drjulieedge