Imagine a playground teeter-totter that can move in only two directions – when one end goes down, the other must go up. The same is true of the value of your company as it relates to your cash flow – the more cash an acquirer must inject into your company when taking it over, the less that acquirer will pay for it. The inverse is also true – the less cash your acquirer must deposit into your business, the higher the price he or she will pay.
Balance Your Teeter-Totter
Your goal should be to create a business that accumulates cash as it grows. One way to do this is to create a positive cash-flow cycle by getting customers to pay you sooner, while you lengthen the time it takes you to pay your expenses. In addition to maximizing your overall profitability, having money in the bank makes running your business that much more enjoyable before you sell.
Consider the following:
- If you bill your customers in installments, could you charge them a greater percentage of the overall price upfront?
- Could you evolve your business into a subscription or membership model in which you bill customers before they receive the benefits of their membership or subscription?
- If you sell a service, could you do more to “productize” your offer and thereby make it easier to charge upfront?
- Could you reduce the amount of inventory you pay for in advance of needing it?
- Could you lengthen the time it takes to pay some vendors?
The Valuation Teeter-Totter is one of eight drivers of your company’s value. Get your score on all eight by completing your Value Builder questionnaire.