Approximately 70% of all growth plans fail to hit their target. Is it a coincidence 75% of all businesses listed fail to sell? The major cause of a business not selling can be attributed to being incorrectly priced. The price of a business is directly attributable to cash flow. The most common cause of growth plans failing is due to the poor management of cash flow. The obvious conclusion? Both are related to cash flow.
When preparing a business for sale, one aspect we focus on is cash flow since it is a major ingredient in determining a realistic price. Cash flow is also a huge component in the growth of a business. By addressing cash flow, you not only will take a step towards increasing the odds of achieving your growth plan, but you will also increase the salability of your business.
As a business owner, you may not be thinking about selling your business, but you certainly are thinking about how to grow it. Colin’s business was growing and profitable and yet he seemed to always be short of cash. He thought everything was fine. He was told “not to worry” it was because he was growing, and everything would be fine. But not everything was fine. The issue was not solely in the fact he was growing. It was primarily due to extreme excess capacity in equipment and buildings. His growth plan did not account for when to add additional capacity. It was based on tax planning which is typically in direct contrast to cash flow planning. We were able to help him identify several ways to reduce the short-term cash flow requirements, increase revenues, and address excess capacity. Within six weeks, he had reduced his cash flow requirements by 27%, increased monthly revenues by 3%, and reduced his excess capacity down from 76% to 37%. It is important to state, he did not eliminate the excess capacity. It was redirected it for the short-term, allowing him the flexibility to gain capacity as he needed it without additional financing or cash outlay.
Profit is the driver of the business long-term. But cash flow drives the business short-term. It also drives the value of the business and the growth plan. Without cash flow, it is difficult to sell the business and achieve your growth plan. Improving your salability and making your business sell ready you increase the odds of achieving your growth plan.