Tips To Improve Cash Flow And Build Business Value

by Dave Driscoll

Tip 1: Incentivize key employees to increase cash flow over baseline. Use WIIFM (What’s In It For Me?) to align your cash flow goals with employee behavior. Let’s say you want to reduce your product’s material costs or increase your margin on sales. Perhaps past efforts of telling employees what you wanted and training them to implement changes resulted in spotty acceptance and inconsistent outcomes that did not meet your needs or expectations.  

This time try incenting those responsible for the implementation with the additional value you are looking to achieve! (Remember that the objective must be realistic, measurable and achievable.)

Let me put it in dollar terms: If you want to reduce monthly material costs from $20,000 to $18,000, you want to achieve a $2,000 savings. How much of that $2,000 are you willing to share with those who can influence the outcome? 10%? 15%? 25%? Enlisting employees to help you achieve your goal, and rewarding them for doing so, improves the probability of attaining and maintaining the goal.

The WIIFM incentive can take any form you choose that is meaningful to the employee(s) – cash, time off, whatever. In my opinion, cash often works best because employees become dependent on the extra cash, ensuring their motivation to keep the business achieving your objectives over the long term.

The bonus for you? Reducing costs and/or improving gross margin will increase cash flow and make the business more valuable.

Tip 2: Accurately value and account for your inventory at least every quarter. Your on-hand inventory at the end of an accounting period is a very important number. Conduct a physical inventory at the beginning of each accounting period and then compare with the specific value and quantity of inventory remaining at the end of that period. The difference between those numbers is the amount of inventory consumed by the business during the period (a reduction of inventory) or the amount of inventory purchased during the period and not consumed by the business (an increase in inventory). The difference is called “inventory adjustment” and will either add or subtract value from your cost of goods sold.

Accurately accounting for the amount of inventory “used” in your system is extremely valuable in determining profitability and, by extension, the cash flow of the business.

Example: A client didn’t take a physical inventory for many years – let’s just say more than five years. Each year when the accountant asked for the inventory number, the owner looked at what he determined to be the historical cost-of-goods-sold percentage and created a number that 1) supported his historical gross profit percentage and 2) minimized the amount of taxable profit. Unfortunately, there was no correlation between his number and the actual value or quantity of inventory on the floor.

When a business is being prepared for sale, determining an accurate cash flow is the basis for projecting the market value (i.e., the selling price). Historical financial statements and tax returns are relied upon as the foundation for the calculation of value. In this case, for at least five years the cash flow numbers were made up! A physical inventory had to be taken immediately, and the results (valued at cost) produced a reduction of inventory of more than $350,000. That meant the prior period’s cost of goods sold through the business was understated by that $350,000, causing the actual stated period profitability (cash flow) to be negatively impacted. That’s a lot of money!
Don’t kid yourself by manipulating the numbers – the reality will become obvious at a time when you need all the value you can get to enjoy your Life Beyond Business.

Dave Driscoll is president of Metro Business Advisors, a mergers and acquisitions business broker, business valuation, and exit/succession planning firm helping owners of companies with revenue up to $20 million sell their most valuable asset. Reach Dave at DDriscoll@MetroBusinessAdvisors.com or 314-303-5600. For more information, visit www.MetroBusinessAdvisors.com.