4 fundamental reasons to generate cash (that you may not have thought of)
I was talking to a director of a growing family business the other day - we were talking about how his businesses was going and what his plans were for 2019 – it all sounded pretty exciting, and I started asking him about how cashflow was in his business.
“Yeah it’s ok” he said
I wasn’t too sure what that meant - “What do you mean – are you generating cash?”
He came back with “What I mean is we’re managing to keep within our overdraft limit, we can pay our suppliers – so it’s ok”
Then it suddenly dawned on me – why should this business be bothered about generating cash? It was a growing business, making money, why should we even think about making it generate more cash?
I stopped for a few seconds, and I told him he should be thinking about making his business generate spare cash. He asked why, and this is what I told him:
It might sound strange, but hear me out. If you’re a cash generating business, that makes the goodwill value of your business higher! You want to maximise the value of your business so that when it gets to the point of sale, your business is worth some serious money and you can really get rewarded for the many hours of hard work you’ve put in. If you look at the goodwill value of your business now compared to what it could be if we ran it in an efficient, cash generating way, you can see the difference it makes to the goodwill value:
|
This is your business now: |
This is what it could look like |
|
Plant and machinery 50,000 Stock 320,548 Debtors 616,438 Cash 10,000 946,986
Trade creditors 192,329 Other creditors 275,000 467,329
Net assets 529,658 Income producing assets 519,658 280,342 |
Plant and machinery 50,000 Stock 284,932 Debtors 493,151 Cash 211,644 989,726
Trade creditors 235,068 Other creditors 275,000 510,068
Net assets 529,658 Income producing assets 318,014 481,986 |
Being a cash generating business gives you the resources to repay loans and reduce your reliance on debt, which puts you in a far safer and stronger position for whatever the future might bring.
Having cash available in your business gives you the means to be able to support those around you that your care about – it means you can support your family and can support charities. If you’re not generating cash, you just can’t do that, because you have to retain every penny in the business to keep it going.
It gives you breathing space
Having healthy cashflow gives you choices, and gives you freedom. It means when a big opportunity comes up, you’re able to move to take advantage of it, because you’ve got the resources available. That’s important, because it means you’ll be able to take opportunities to improve profitability and grow your business, allowing you to build a stronger, more valuable business. Liquidity also gives you time and space to make decisions, so you aren’t forced into a tight situation where you are at the mercy of your creditors, the banks or anyone else apart from you.
So it’s about much more than just surviving and being able to pay your suppliers on time – it’s about making your business worth more when you ultimately come to sell it or pass it on, so you get the deserved reward for the work you’ve put into your business. In the meantime it means you can be less reliant on banks and other external financers, and you can properly support the people and causes that you care about.
It’s worth some more consideration. How can we make your business cash generating?
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