The Factor You’re Missing When Valuing Your Business

There are many factors that determine the value of your business.

If you’ve started planning an exit strategy that involves selling your business later on, you’ve no doubt considered many of them.

A valuable business is essential to a potential buyer. But have you thought of everything?

Profitability is a key point when deciding the value of a business. A profit and loss statement only reveals a portion of your company’s financial potential.

Cash flow, or the money going in and out of your business, has a large role to play when factoring value.

Profits Don’t Equal Cash

If your business continually shows profit year after year, that doesn’t necessarily explain the working capital needed to run the business. You should be aware of how different income streams affect your overall value.

If you receive lump sums up front, or have predictable recurring income, you’ll have greater visibility of how effectively your income covers expenses. If you rely on clients to pay in installments, the income will be more evenly distributed throughout the months.

At the end of the year, although a profit may be shown in your records it doesn’t rule out a potential buyer having to inject a large amount of capital to cover expenses upfront – something that will lessen the value of your business – even a profitable one.

How To Increase Cash Flow

Sellability is key for you to attract potential buyers, and cash flow plays a big part of that.  In order to increase your cash flow, and increase your business’s sellability, consider these points:

  • Are there ways to cut the daily operating costs that take up most of your cash flow?  Can you negotiate rates with vendors or utilities?  Could your business still run effectively if you had less space or with less expenses?
  • Can you source equipment needed for your business at a discount? Rather than paying standard retail for new, expensive equipment, consider alternatives like online sources, or purchasing from other non-competing businesses.
  • Can you re-negotiate payment terms with clients, or ask for money upfront on lengthy projects?

Many business owners think of profitability as the ultimate goal, and while it does increase value, cash flow reduces a buyer’s upfront investment, meaning they can pay more money for the business itself. Cash flow and profitability work together to build the value of your business.

Reducing your expenses and increasing the frequency of client payments can make a big impact on your sellability and add immeasurable value to your business.

Do you consider cashflow a key part of your value creation? Let us know in the comments

Leave a Reply