By Ellen McIlhenny
Most business owners with whom I talk seem to be obsessed with revenue and revenue growth. In fact, that is usually the lead when we discuss the health or salability of the business. However, what most potential buyers want to know, is how much cash will the company generate for them in the future years after the purchase. In most cases, the sales price will be based upon that number. Without a positive cash flow a company will most likely eventually go out of business. Tight cash flow can cause undue strain on a small business. The ability to pay bills in a timely manner helps to build a positive relationship with vendors, and if there is ever a time when cash is very tight they are much more likely to work out a short-term solution. In addition, expansion is virtually impossible without at least some cash in reserve. When attempting to attain a loan for that expansion a company must be able to demonstrate a reasonable ability to pay their bills. My recommendations to small business owners is to look at their cash balances daily and have some semblance of a forecast for the near future, to plan where the money is coming from and where it is going.
Case in Point
Just because a company’s sales are booming and the profit and loss statement looks great, doesn’t always mean the company is healthy. This article by Jill Hamburg-Coplan gives three case studies of companies that seemed to have everything…..except cash. http://www.inc.com/magazine/201402/jill-hamburg-coplan/cash-flow-squeeze-growth-companies.html