August 27, 2020
This is part 1 of 3 in the Predictable Future Series on key insights for successfully navigating today’s economic climate.
Small and mid-sized business have faced extraordinary challenges this year.
While some businesses, especially in the travel and leisure space, struggle to stay afloat, many others are using this as an opportunity. They shore up operational gaps and take advantage of the disruptions in their industry to add market share. In the meantime, others are looking for the exits as they are not interested in waiting out another market cycle.
The opportunities and challenges are more pronounced right now.
We have seen this before in the private business market. The CoreValue research of over 25,000 businesses discovered that:
● 19% said they want running their companies to be easier
● 59% said they want to grow
● 17% are preparing to sell their company but based on their valuation, would not sell for what they need to fund their family’s long-term wealth… meaning they need to grow!
Bottom line, for over 75% of companies analyzed prioritize growth.[1]
Even among companies that prioritize making the company easier to run, they will often grow the value of their companies by plugging operational holes that are holding them back.
The challenge for business owners is really identifying what “growth” means for them.
What we have found, is that there are 3 Elements of Business Growth that match the 3 top priorities that business owners have identified:
- Predictable Profits and Cash Flow
- Sustainable Growth
- Defendable Equity Value
We will focus this installment of the Predictable Future Series on Predictable Profits and Cash Flow and will follow
up in the coming weeks on Sustainable Growth and Defendable Equity Value.
Predictable Profits and Cash Flow
Generating predictable profits and cash flow is the foundation of any business.
This is your foundation for sustainable growth. This is also the foundation for defendable equity value (as most companies are valued as a multiple of their profit). Without consistent profits and cash flow there is not a market to turn private company equity into cash.
It is important to recognize as a part of this foundation that we include both profits and cash flows.
It is not uncommon for a company that shows a profit on paper (through EBITDA[2]) to be going bankrupt in reality with little or no positive cash flow as often the cash can be trapped in the balance sheet. For example, if you are repaying a loan, only the interest payment will show up on your income statement, but the principal you are paying back could be impacting your cash flow. Another one might be that you built up your inventory in anticipation of an increase in sales. If you are using accrual accounting, you would not expense these items until they are sold so your cash flow is impacted by the purchase but that is not reflected in the profit you are showing on your financial statements.
Think of your business like a car, cash is the fuel to the business engine, without it – you can’t move the business forward to create the growth needed.
The key to building predictable profits and cash flow is not selling more of your product or service. The key to unlocking consistent cash flow is most often found in the processes and procedures within the operations of the business. We call these the Value Drivers of Growth and Equity Value.
What actions in your business enable you to generate more revenue? If you increase the operational effectiveness of your most important processes, you will likely increase the predictability of your cash flow.
The top Value Drivers associated with generating Predictable Profits and Cash Flow are:
1. People / HR – Are there clear and understood roles and responsibilities for each employee that supports the company’s goals and objectives?
2. Senior Management – Does your business have a leadership team in place to realize the company’s vision and mission? Do they have the temperament to drive success?
3. Recurring Revenue – What portion of your future revenue comes from contractually committed customers? The higher the percentage, the more predictable your cash flow.
4. Margin Advantage – Are your company’s gross and net margins greater than your industry’s norm? Do you know what the norm is for your industry’s gross and net margins?
5. Financials – Do you consistently produce financial statements (income, balance sheet and cash flow) and review key metrics that allow for effective communication and review of company performance to drive operational decisions?
6. Sales & Marketing – Do you have a sales plan and repeatable process to deliver on your company’s revenue goals that are well-developed, managed and executed?
7. Operations – Does your company have the ability to deliver on the sales promises made to the marketplace and do it in a systematic and process-driven manner?
8. Customer Satisfaction – Do you track and use key measures to meet customer expectations at all levels?
The key to unlocking this potential is creating a process to evaluate how your business is doing in all of these areas.
This is a lot to unpack. There are many areas of your business that must be firing on all cylinders to generate the Predictable Profits and Cash Flow you desire. The key is having a process in place to evaluate your business objectively and move through the 3 Dimensions of Growth in a systematic way. The first step is to review how your business stacks up in the 8 Value Drivers that are the key to creating Predictable Cash Flow and Profits and creating a plan of action on how to fill in the gaps, make your business easier to run, and be in an even better position to focus on building value in the business.
At Konvergent Wealth Partners we have developed a process that helps streamline these steps to allow you to get to this point quicker and more effectively. Over the years, from working with my top business owner clients and partnering with other professionals in the growth planning industry, we have developed a step by step process to analyze your entire business, starting with the 8 Value Drivers that have the most impact on the foundation of creating Predicable Cash Flow and Profits. From there we help map out the plan for the business to create the value needed to achieve our business owners’ aspirational goals that get them to achieve their amazing life of significance.
If you would like to learn more, please email us at info@konvergentwealth.com or give us a call at 253-236-7000.
[1] (c)2020 CoreValue Research LLC
[2] EBITDA – Earnings Before Interest, Taxes, Depreciation and Amortization