Part Two: Building Value is a Process–Increase Net Cash Flow

Dear Clients and Colleagues:

Last month, I shared Part One in “Building Value Is a Process.”  We discussed the three principles of valuation and the three general approaches to valuation.  We concluded that for closely held companies, the Income Approach is often the preferred method of valuation.  Under the Income Approach, maximizing value becomes a function of increasing net cash flow, decreasing an investor’s perception of risk or a combination of both. 

This month, in Part Two, we’ll focus on various ways that Stevenson Valuation Group can help you, the business owner, increase net cash flow…

        Net cash flow is usually used as the measurement of owner benefit because it is net cash flow that is actually available to pay dividends. 

        The primary determinant of what a buyer will be willing to pay for a business is the future cash flow that the buyer expects to realize from the business.  In fact, the single most important factor in closing a sale is the buyer’s belief that future net cash flow will continue to grow, thereby, increasing the value of the business.

        To increase cash flow, Stevenson Valuation Group can help you focus your activities on cash management and profit maximizing techniques. Examples of some of those techniques follow: 

·         Create a cash flow forecast. 

            In essence, we’ll work with you to set goals equal to your definition of success and then back up your plans with achievable monetary benchmarks.

·         Collect accounts receivable fast. 

        The goal is for you to be the industry leader in collections. By decreasing your collection period can loosen up a surprising amount of cash.

·         Don’t over invest in inventory.

        We’ll help you analyze the movement of inventory with a focus on removing slow moving, cash consuming items.  And, we’ll  help you calculate the savings of reducing the your           Company’s average inventory days.

·         View disbursements as investments. 

        Having an outside view of expenditures helps identify disbursements not paying dividends. We can be that objective voice.

·         Maximize your gross margin percentage.

        Similar to the point above, cost of sales is an investment that is measured by your gross margin percentage.  Too often businesses accept the gross margin     percentage as an end result rather than managing it for a desired outcome.

·         Take care of your employees. 

        A well designed employee incentive plans improves productivity and cash flow.

·         Minimize taxes. 

        Stevenson Valuation Group will take the time to help you understand your basic tax framework and work with your tax advisor to minimize the tax impact of increasing your profit.

·         Invest in technology.

        If your Company is not using the latest and most efficient technology it is losing ground   in the market place and value is leaking out.

Of course, every business is different and the actual steps to improving the cash flow of your particular Company will be specific to your Company.  What’s outlined above are general ideas and should not be considered an all inclusive list.  Stevenson Valuation Group considers each client a unique opportunity requiring a tailor – made strategy for meeting specific goals. 

Please call me so we can discuss and set in motion a plan for you to maximize value.

Next month we’ll discuss how Stevenson Valuation Group can help you analyze and reduce an investor’s perception of risk and the impact of risk on your Company’s value.

If you have any questions about this blog, please don’t hesitate to contact me.

Sincerely,

Thomas G Stevenson, CPA, CVA

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