How effectively does your business generate cash?

The 8 Drivers of Business Value - #4 of 8 - Cash Generation

When your company is being valued as an asset one of the factors evaluated is how effectively does it generate and hold on to cash....Cash really is king and your businesses ability to generate it and keep it is a key factor to its valuation. Let's break this down to explore what it means and differentiate it from Value Driver #1 which is Revenue and Profit.

The businesses ability to generate cash in this context is mainly related to how it manages its accounts payable (AP) and accounts receivable (AR). As an example if you have a business that gets paid (AP) on Net 60 from your customers but have to pay (AP) before services are rendered this creates a cash suck because in order for you to have a profit (assuming you are actually making one) you would have to take a dip in available cash on hand to fulfill the work to get paid by your customer. In this scenario is is more challenging to grow quickly because it would require cash infusions from outside sources to support fast growth.

In another scenario lets say your get paid upfront before starting work from your customers and then any fulfillment cost are on Net 60 terms with your suppliers and vendors. This puts your business in a position of generating available cash because of the time difference between receiving payment (AR) and having to payout to your vendors (AP)

While there are other factors that can impact Cash Generation based on your business model how you manage your AP and AR are two major factors.

Having a business that generates cash as opposed to sucks cash is a key factor in business valuation and in the sellability of your company.

Have an interesting business story to share about a lesson you learned in regards to cash generation or managing AP/AR?

How can I help you be more effective at managing this aspect of your business?

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