Cash is the lifeblood of any small business, sometimes determining its success or failure. Correctly measuring and managing cash flow, determining bottlenecks, and alleviating them creates a better run business and a more valuable company.
When measuring cash flow, the ultimate goal should be to produce and distribute cash without outside debt, lines of credit, or investments. A well run and valuable business should produce enough cash on its own to thrive. The concept fits with the Valuation Teeter- Totter driver.
- The Valuation Teeter-Totter reflects the impact your cash flow, gross margin, and profitability have on your company's value. 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 an acquirer must deposit into your business, the higher the price they will pay.
- 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 to pay your expenses. In addition to maximizing your overall profitability, having money in the bank makes running your business that much more enjoyable before you sell.
Depending on what the goal is – to build a more valuable company or to sell the business, understanding the mechanics of cash in the business is critical. Trying to put rules in place to help employees collect faster from customers and pay vendors slower will have a dramatic impact on the business' value by eliminating bottlenecks.