Cash FlowJuly 7, 2020by Business Valuation TeamHow Do Cash Flow Issues Lessen Your Value As A Business?

As a business owner of any size, you must have a firm grasp of your business inside out to prosper. It has been adequately researched many times on common cash flow issues that have plagued almost all the businesses (including in Singapore) that have failed. They are namely:

  • Management of Receivables
  • High Overhead Costs
  • Growing Too Quickly

Management of Receivables

Receivables for those not versed with the term represents money due to the company from its customers. The business has delivered its services or products to a customer but the latter has not yet accomplished their obligation of making payments. The longer the collection takes or days taken to obtain payment for receivables the higher the risk of companies suffering cash flow issues.

Also, the longer days in receivable further increase risks of default which also may affect your business. An ideal business managing its receivables adequately has collections in reasonable days normally within 30 days depending on the business. Less days in receivable is associated with less cash flow challenges and higher business value.

High Overhead Costs

Majority of businesses have also overlooked their overhead costs. Businesses operating in an environment with high overhead costs such as rent face higher expenses that lessen their profits. A less profitable business faces cash flow issues as it is not generating sufficient profits to fund its operations or growth prospects.

Discounted cash flow valuation relies on information presented in the income statements to evaluate the value of a business. Lower profitability yielding from higher overhead costs will point to more cash flow problems with possible degeneration into losses worsening the scenario. Therefore, keeping you overhead costs in mind and watching them to ensure they support business cash flows is essential.

Growing Too Quickly

Growing businesses also replicates the same in their cash flows. Expanding too quickly may create cash flow problems for businesses. For instance, you are awarded a contract that would require expansion of the team to add a significant number of employees, and a further capital need in the business.

This may force business owners to seek loans hence increasing the liability in their business. Economic value added as a means of valuation relies on subtracting total liabilities held by a business from its total assets and shareholder equity. Vast liability volumes will yield lower value for the business.

So naturally, these factors affect the financial performance of the business and consequently lowers valuation. It is important to know that financial statements are one of the primary source of information that is used in a valuation process.

Our Take To Overcome These Issues

In this regard, the valuer should then be capable enough to interpret and use the correct figures that reflect the true performance of the business, instead of relying plainly on the figures as is shown on the balance sheet. Prudence, wisdom and acumen should be exercised in such scenarios.

Speak with a Qualified and Experienced Valuer.