How to Improve Your Company’s Cash Flow

“Never take your eyes off the cash flow because it’s the life blood of business.” – Richard Branson, Founder of Virgin Group, Philanthropist, Investor

You already know that your company’s revenue and profits play a big role in how much your business is worth, but do you know how to improve your company’s cash flow?

Cash flow measures the cash coming in and out of your business rather than an accounting interpretation of your profit and loss. For example, if you charge $10,000 upfront for a service that takes you three months to deliver, you recognize $3,333 of revenue per month on your profit and loss statement for each of the three months it takes you to deliver the work.

However, since you charged upfront, you get all $10,000 in cash on the day your customer decides to buy. This positive cash flow cycle improves your company’s valuation because when it comes time to sell your business, the buyer will have to write two cheques: one to you, the owner, and a second to your company to fund its working capital – the cash your company needs to fund its immediate obligations like payroll, rent, etc.

The trick is that both cheques are drawn from the same bank account. Therefore, the less the acquirer has to inject into your business to fund its working capital, the more money it has to pay you for your company.

The inverse is also true.

If your company is slow at collecting contracted revenue, the purchaser is going to calculate that they need to inject a lot of working capital into your business on closing day, which will deplete their resources and reduce the amount on the cheque they write to you.

There are many ways to improve your cash flow – and therefore, the value of your business. One often-overlooked tactic is to spend less on the machines your company needs to operate. Here’s an example.

In the restaurant business, there is an often-repeated truism that it takes three bankruptcies at a single location before any restaurant can make money. The first owner of the restaurant walks in and – with all of the typical optimism of a new entrepreneur – pays cash for a brand new commercial kitchen complete with a fancy stove, commercial grade walk-in coolers, etc., as well as all new dishware, pots and pans, depleting cash reserves before opening night. Within a year, the restaurant owner runs out of cash and declares bankruptcy.

Along comes a second entrepreneur who decides to set up a restaurant at the same location and buys all the shiny new equipment from owner number one’s creditors for 70 cents on the dollar, figuring it’s a wonderful deal. Unfortunately, the outlay of cash is still too great, and the second owner is also out of business within a year.

It’s not until the third owner comes along that the location actually survives. They save cash by buying all the equipment from the second owner for 10 cents on the dollar.

The moral is: find a way to reduce the cash you spend on equipment, however you can. Can you buy your gear used on sites like eBay? Can you share a very expensive piece of machinery with another non-competitive business? Can you rent instead of buying?

Profits are an important factor in your company’s value, but so is the cash your company generates. If you’d like to find out how you can improve your company’s cash flow and other ways to increase the value of your business, take the complimentary Value Builder questionnaire, available from The Osborne Group. The questionnaire, developed by internationally recognized small business expert John Warrillow, gives results based on findings from over 17,000 companies. Your answers will help determine what drives up, or undermines, your company’s value and the steps you could take to increase its value.

To find out how your company is performing, click here to take the Value Builder questionnaire: http://www.thevaluebuildersystem.com/osborne-group

Click here to see how other Value Builder factors impact your company’s worth. :

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