Why Cash is King

June 8, 2018

Importance of Cash Flow

 

If your goal is to grow your business, you need a positive cash flow cycle or the ability to raise money. Anything less and you will quickly grow yourself out of business.
 

As the saying goes, “Cash is king”. Without the proper amount of cash on hand, businesses can run into major trouble, and even be forced into bankruptcy.
 

Cash is important for many reasons, businesses may wish to invest in new infrastructure, fund inventory purchases or have to deal with unexpected expenses such as Repairs & Maintenance.
 

Frequently, cash flow is described as a key factor for a business’s potential for long-term success. A company may have all the revenue in the world, but without the ability to generate cash, it can easily fail.


What is Cash Flow?
 

A positive cash flow cycle simply means you get paid before you have to pay others. A negative cash flow cycle is the direct opposite: you have pay out before your money comes in.
 

A lifestyle business with good margins can often get away with a negative cash flow cycle, but a growth-oriented business can’t, and it will quickly grow itself bankrupt.
 

According to a joint study by the Kauffman Foundation and Inc., roughly two-thirds of the fastest-growing startups end up failing. Research from California State University also showed that companies studied that had fast revenue growth performed worse, long-term, than their slow-growing counterparts.
 

Many profitable companies go bankrupt. With the promise of more orders and revenue, they react too quickly and start hiring and buying equipment before they have the revenue or startup capital to substantiate those investments.
 

How does Cash Flow impact Value?
 

Many owners think cash flow means their profits on a Profit & Loss Statement. While profit is important, acquirers also care deeply about cash flow—the money your business makes (or needs) to run.
 

The reason is simple: when an acquirer buys your business, they will likely need to finance it. If your business needs constant infusions of cash, an acquirer will have to commit more money to your business. Since investors are all about getting a return on their money, the more they have to invest in your business, the higher the return they expect, forcing them to reduce the original price they pay you.
 

So, whether your goal is to scale or sell for a premium (or both), having a positive cash flow cycle is a prerequisite.
 

To learn about strategies to improve your business’ cash flow or to understand the impact of the 8 key drivers of value on your business, either email us or call Phil on 07980 915676

 

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