Cash Movement: Healthy Cash Flow for Business Strength

Posted by:
Bill Goldberg
December 10, 2019

Business Health Driver #4: Cash Movement

in our blog 8 Indicators of Business Health, we shared some of the key drivers of the overall health and value of a business. These indicators help business owners sustain, grow and/or prepare to sell their privately-owned business. So far, we’ve discussed Driver #1: Financial Performance and Driver #2: Growth Potential, and Driver #3: Independence. Next on the list is one of the key places where the rubber meets the road, Driver #4: Cash Management / Cash Flow for Business Strength.

Healthy Cash Flow for Business Strength

Between where you’ve been (Financial Management) to where you’re heading (Growth Potential) lies the foundation for the strength of your business. We started the foundational conversation talking about diversified revenue streams (Independence). But setting your business up for success and/or sale takes more than just knowing where the money is coming from. If you’re in good shape, you’re able not only to generate positive cash flows (cash in minus cash out) now but also to maximize long-term free cash flow.

Long-Term Free Cash Flow

The ability to generate positive long-term free cash flow means that the liquid assets of your business (cash in hand or assets that can be readily converted to cash) are growing so that you can reinvest, settle debts, survive a downturn, and pay yourself and other investors/owners/shareholders.

Reinvestment: This can mean anything from top talent retention/recruiting to technology upgrades, R&D expansion, marketing for lead generation or customer appreciation. Strong, healthy companies that are sustainable and/or sellable have the long term free cash flow for continuous improvement and growth. Companies without it are likely to appear stagnant, with limited growth potential.

Debt Reduction: Most companies maintain some level of debt, in fact installment debt can add to an entity’s overall fitness. But excessive, sustained or revolving debt can be costly and limiting. Long-term free cash flow is essential to any organization’s ability to pay down its debt, reducing liabilities for a stronger balance sheet and business valuation.

Air Cover in a Downturn: When the economy or a given market enters a downturn, it’s the strong, stable companies with free cash flow that have the best opportunity to weather the storm. Heading in with a lower debt burden and more cash on hand can allow for business as usual, or even the chance to capitalize on market or development opportunities while others may struggle to keep the lights on.

Return on Investment: Last but not least, when your company is generating positive free cash flow, you have more flexibility to pay yourself and other investors/shareholders. This should not be underestimated. No one invests without expectations that it will generate a return at some point. And just as importantly, the ability to generate returns is a critical consideration for prospective investors or buyers.

Consider the Alternatives

Whether your goal is to sustain or to sell, business health is the only way to get the most out of your life’s work. If you’re ready to assess the state of your business and/or work toward a healthier state, there are a number of ways to approach the process. Learn more and/or take an assessment.

We are the W Alexander Group, headquartered in Cincinnati. We are not consultants or business brokers. We are private minority investors who work in active partnership with owners to provide an alternative to selling their business now through strategic and operational initiatives.  Our uncommon approach protects owner equity and provides an interim step, allowing for a more planful change and down-the-road sellability when you are ready to transition.

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