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Bank Statements: Weapons of Mass Destruction

Posted On - 18/11/2016 07:44:28

Fail to manage cash and you could easily destroy your businessNoticed anything about this series – "How to Create a Business Worth Buying"? Think it's making a bigger point? Well, while it's not been written to do this it does seem to be trying hard.

Most experts recommend best practices because they're ‘right'. That certain things should be done certain ways because that's how they should be done. But does that make sense? Can managerial proficiency really be commercial?

Turns out "Yes". Best practices, implemented well, make your business worth more to buyers. Established best practices clearly operated and applied drive up what buyers will pay. So what's the issue this week? Making your business cash-generative.

Did you hear the one about the banker?

We're not having a laugh - this is no joke. It's not some riddle either. We're mentioning the banker's mantra. Because it makes a really relevant point. "Turnover is vanity; profit is sanity; cash is reality". Bankers devised it as shorthand to explain pitching for loans. And when you think about it, they're right.

Turnover – aka revenue or sales – is no basis for lending. If you're spending more than you're making you're losing. So looking at sales alone says nothing about how well you're doing. So what about profit? Well, it's better than turnover – it tells you you're making money – but it's still not right for lending. Profit doesn't tell you how much money you've got. What's in your account really matters. It's not for the bank to fund your loan repayments – it's you. And for that you need cash.

While you can make a loss a few times…

you'll only run out of cash once.

So said Luke Rebbettes of BCMS when he spoke at our 2016 Open Day. He's dead right. Become insolvent and you could easily end up bankrupt. And managing your business using bank statements – like many of you do - only makes things worse. They don't include cash-flows not yet cleared. Even online they're inaccurate. Plus they only record the past, they do nothing to inform you of the future. They do nothing to help you decide on business now. They do nothing to help you run your business with any real confidence.

You need to manage cash-flows and control credit. But those things aren't for this post. What is, is reassuring the buyer your business can stand on its own two-feet. And you do that by proving you're cash-generative.

How much?

But what does cash-generative mean? Luke didn't use the word ‘profit' when he spoke about "How to Create a Business Worth Buying" he chose his words. He chose to pick out the point "being cash-generative". The question is why? We already know profit and cash are different, so that's part of it for sure. But he's going further and saying something more profound.

Cash-flows in and out of your business go up and down. The net total rises and falls and, unless you have an overdraft, stays positive. Nothing new there – exactly what you'd expect. But, a cash-generative business has the edge on this: it's a business where the net cash balance is always growing.

What this means is after all costs, all wages and all your benefits there's always more money spare than there was last month. So the business is constantly creating ‘excess' cash it can reinvest for growth. Now that's a healthy business. It's one that's truly making money. And that's why buyers like them.

Tightening the nuts

It's said beauty is in the eye of the beholder. The same is true of profitability. Meaning how much cash your business generates is too. What?! Well, whether your buyer is another business or not how much cash YOU generate from your business isn't necessarily the same as it would be for them. Their ‘costs' may well be different. Take your pension. They may well have arrangements elsewhere. Suddenly that ‘cost' for you isn't for them – it's cash. Your partner might be on the payroll for, shall we say, ‘convenience': they may not have that – more cash. You're paying for a van: they've already got its cost covered elsewhere – yet more cash. Just a few examples but you get the picture?

There's all sorts of potential costs you have they simply won't. Called adjusted profits there's nothing wrong or underhand in any of this, it's just realising how much cash your business could generate under someone else's ownership.

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