We see many owners looking to sell within the next few years and they want the highest price possible. Many have a value in mind, and to help achieve this, owners must understand how they make money and how they generate cash flow to support profitable growth. Your accounting statements won’t give you this information. You need to develop the correct Key Performance Indicators (“KPI’s”) specific to your business that accurately measure and monitor your progress.
To increase the value of your company, engage a strategic and operational consulting firm to help you identify and measure the specific KPI’s that drive your business. Owners want options when it’s time to think about selling. Whether owners decide to continue to operate their business, move to absentee ownership, or sell to a third party, a company with a solid strategic focus, a strong and profitable customer base, and excess cash flow will offer the most options.
While there are numerous KPI’s for businesses, here are two that will help increase the value of your business: (1) Customer Profitability and (2) Cash Flow.
Customer Profitability
When potential buyers review your financials, they conduct a quality of earnings analysis. This verifies the loyal customers, the most profitable ones, and the ones at risk of leaving after the sale. The stronger the base of long-term, good, and profitable customers, the higher the business valuation. Here’s what customer KPI’s will tell you:
- Conversion rates of prospects into customers – are these the right prospects
- Costs to convert prospects into customers
- Costs related to maintaining and servicing existing customers
- Which current customers increased their purchases
- What gross margins are generated from new customers, current customers maintaining historic purchase levels, and current customers increasing purchase levels
- When do customers pay
- What commissions and customer incentives are required to generate these sales
You will now know what it costs to acquire and keep a customer and the expected profit generated from each one. By knowing who your best and most profitable customers are, you will know where to allocate your resources, and how to maximize profits.
Cash Flow
Businesses need cash to operate, and those with strong cash flows have funds to grow and absorb the effects of business disruptions. Strong cash flow allows businesses to acquire new customers, enter new markets, develop new products, hold off actions from competitors, obtain outside financing at a lower cost, make strategic acquisitions, and have the means to retain key employees. Strong cash flows help maximize profits.
Cash Flow is the lifeblood of every business – businesses can’t operate without cash. Companies budget for revenue and expenses at the beginning of the year, but rarely look at expected cash inflows and outflows. Will you have enough cash to operate – where will your cash come from and how it will be used during the current year? When might you be at risk of running out of cash?
A 13-Week Cash Flow report shows when accounts receivable are expected to be collected, when bank loans need to be drawn down, and what proceeds are anticipated from equipment sales, as well as where cash will be used for items such as materials, equipment, salaries, insurance, rent, utilities, interest, taxes, etc. For a good 13-Week Cash Flow report you need to:
- Make educated guesses as to when you will be paid on your Accounts Receivable and when you may need to borrow from your bank
- List all known and expected bill payments and salaries payable by the week they are due to be paid
- Run some pro forma cash scenarios where you only collect 90%, 75%, and 65% of your Accounts Receivable, and then determine what adjustments to expenses are needed in order to have enough cash to operateQuality Cash Flow reports get updated weekly, management compares the actual to the projected, and adjusts the projections. Analyzing and adjusting incorrect assumptions helps improve the accuracy of the report. Cash Flow scenarios help companies be prepared for the unexpected.Engaging a consulting firm like Burnham Capital to develop appropriate KPI’s allows companies to identify the actions that will increase the value of a business. Owning a business with a good strategic focus, a strong and profitable customer base, and solid cash flow offers many options to owners, whether they continue to operate their business, move to an absentee ownership position, or sell to a third party.
At Burnham Capital we work with companies to help them excel. If you would like to discuss how to find the right KPI’s to increase the value of your business, please reach out to us for a complimentary consultation.
David Bogetz Burnham Capital Partners, LLC 847-236-0886 http://www.burnhamcapital.com
