Well there’s no new news in this statement is there?
Cash has always been a critical element of any business.
What then are the business valuation and sales implications of the cash elements of the business?
Underfunded business are usually underperforming businesses
If cash is doing the triple bypass and going straight into the pocket then it is extremely hard to prove to a prospective purchaser / investor that it ever existed. If it’s not in the books it never happened as far as the sceptical advisor and the potential financier are concerned.
Sure some industries are notorious for skimming cash off the top but you can’t have two bites of the cherry – if you take advantage of some ‘free’ cash, you can’t then assume that you can reap the benefits of that income when you are looking to sell or attract an investor.
Good cash flow = good relationship with the business’s financiers = better prospects of having the acquisition funded by that financier.
Cash is mostly tied up in Accounts Receivables (Debtors) and Inventory (Stock) – it’s a strain on the new owner / investor to have to fund stock that can’t be quickly turned into debtors and then into cash. Work towards keeping both stock and debtors as low as is efficient.
The level of cash demand often equates to the life cycle of the business – early on there is huge cash demand to fund growth, later in its life the pressure is on the business to maintain assets and develop new offerings.
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