You already know that your company’s revenue and profits play a big role in how much your business is worth.
Do you also know the role cash flow plays in your valuation?
Cash vs. Profits
Cash flow is different from profits in that it 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 record £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.
But since you charged upfront, you get all £10,000 of 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 in a cash hole, a buyer 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 lessen the cheque they are able to write to you.
For a no obligation meeting to discuss maximising your business exit, please call me on 01299 405999, or email firstname.lastname@example.org.