The simplest way to increase the value of your business

How a dollar turns into more than a dollar

Here are four simple financial objectives in any business: generate more cash, cut interest costs, reduce debt and boost value.  Your product and marketing strategies address these objectives at the revenue and expense lines. But for any company, be it highly successful or struggling, a focus on cash flow can also aggressively optimize all four targets.

The fact is boring stuff like cash flow management boosts your wealth. Every dollar you create or save is worth more than a dollar.

Before you switch off, check out a real example

A client runs a successful business. Nonetheless, last year it had in excess of $100,000 in outstanding debtors stretching out past 120 days. He is a positive person. His view: it’s probably a hassle to fix it and I can afford it. The reality: it’s not that hard to fix and the return on doing so is worth the trouble.

Over a couple of hours we reviewed his payment terms and conditions. We aligned them with industry standards, ranked his client base in three categories, giving the best clients the best terms and offering standard ones to the others. A letter was sent out explaining the new policy, adding that accounts over 30 days would be charged interest at a rate equal to the firm’s overdraft rate.

Recalcitrant payers (many way out over 120 days) were offered the opportunity to clear the outstanding for fifty cents in the dollar. After that, a deposit would be required prior to supply. Those not prepared to take up that offer would be referred to a collection agency.

Tough approach or tough love?

Some bad debtors ceased to be clients, but that underlined an old adage: if you lent someone $50 and never saw them again, it was probably worth it. Most clients acknowledged the policy was both professional and fair. Rather than harm the firm’s reputation, it enhanced it.

The results? Three months later, no account was more than 60 days outstanding. His monthly outstandings improved by more than $90,000. The firm’s overdraft was drastically reduced. Even the collection agency raised a few thousand. Interest charges fell by $750 per month, saving $9000 per year, which fell straight through to the bottom line. Profit rose by the same amount. So three of the four objectives were easily met: cash was generated; interest charges fell and debt was reduced.

What about the fourth?

The value became clear when someone offered to buy the business. The price was equal to 5 times his profit, which was now $9000 higher. In other words, the value of his business rose by five times $9000, or $45,000. Not bad for a morning’s work.

Every dollar your save or earn in business is worth more than a dollar. Businesses sell for a multiple of their earnings. That multiple may be low, but is invariably more than one and can stretch out to a double-digit number for sustainable businesses with growth potential in favored sectors. Savings might only be $100 but you've probably created $500 worth of value.

If you are wondering whether having tighter cash management is worth the trouble, don’t just see it in terms of the cash it will bring in. It will do more than that. It will enhance the sustainability of the business, lift it’s professional standing, and most importantly, boost the firm's value by a quantum of what you have saved.

Want to do more on this? Here are several free options that might help.

To see how simple cash flow management is, click here. 
If you want to implement a basic cash management project, click here for a checklist of what you can do.
For step-by-step instructions to review your terms and conditions, try this simple guide.