Tip To Improve Cash Flow & Company ValueOutside Contributor
You already know that your company’s revenue and profits play a big role in the value of your landscape business but do you know the impact of cash flow and your landscape business valuation?
Cash flow is different than profits in that it measures the cash coming in and out of your landscape business rather than an accounting interpretation of your profit and loss. For example, if you charge $10,000 upfront for a job or service that takes you three months to deliver, you recognize $3,333 of revenue per month on your profit and loss statement for each of the three months it takes you to deliver the work. But since you charged upfront, you get all $10,000 of cash on the day your customer decides to buy and pay. This positive cash flow cycle can improve your landscape company’s valuation because it helps with your working capital requirements – the cash your company needs to fund its immediate obligations like payroll, rent, etc. The more cash and working capital your business generates, the less need it has for financing and the cost and burdens that come with financing.
Of course, the inverse is also true. If your company is a cash suck that requires working capital you will need financing and all its explicit and implicit costs.
How To Improve Your Cash Flow
There are many ways to improve your cash flow – and therefore, the value of your business. In a prior post we talked about collecting receivables faster and extending payment terms but an often overlooked tactic is to spend less on equipment and machines your company needs to operate. Not to say you should invest in jalopies or go without, but be frugal and don’t pay for steel, paint and horsepower that is not needed.
While not in our industry, the text book example of this is the restaurant business. We have all seen the neighborhood restaurants that come and go. The pundits say it takes three bankruptcies at a single location before any restaurant can make money. The first owner of the restaurant walks in and – with all of the typical optimism of a new entrepreneur – pays cash for a brand new commercial kitchen complete with fancy stove, commercial grade walk-in coolers, etc., as well as all new dishware, pots and pans, thus depleting his cash reserves before opening night. Within a year, the restaurant owner runs out of cash and declares bankruptcy. Then along comes a second entrepreneur who decides to set up her restaurant at the same location and buys all of the shiny new equipment from owner number one’s creditors for 70 cents on the dollar, figuring she has made a wonderful deal. But the outlay of cash is still too great and she too is out of business within a year. It’s not until the third owner comes along that the location actually survives. He saves his cash by buying all of the equipment off the second owner for 10 cents on the dollar.
The moral of the story is find a way to reduce the cash you spend on equipment and machines however you can. Can you buy on sites like eBay, Craig’s list, used equipment sites, distributor bulletin boards, etc.? Can you share a very expensive piece of machinery with another non-competitive business? Can you rent instead of buying?
Profits are an important factor in your company’s value but so too is the cash your company generates. We call this phenomenon The Valuation Teeter Totter and it is one of the eight key drivers of the value of your company. If you want to learn more about the eight drivers, just send me a quick e-mail .