In Real Estate, the saying is LOCATION, LOCATION, and LOCATION. Now that saying is definitely true but how about in business? Well it’s partially true, location is very important to a business, however, I would say the real item of concern to every business is CASHFLOW, CASHFLOW, CASHFLOW. We have all heard that “Cash is King” or the Golden Business Rule, “He who has the GOLD makes all the rules”.
Each business needs to make a profit; you can only sustain losses for so long. Profits are the lifeblood of an organization, however Cashflow is the true measure of any business. The Formula for Cashflow is as follows:
Net Profits |
Plus Depreciation |
Plus Amortization |
Plus the Change in Accounts Payable |
Less Change in Accounts Receivable |
Less Purchased Assets |
Cashflow |
With Cashflow, you understand the true changes in your business. Depreciation and Amortization are purely tax-related expenses and are therefore added back to Net Profits. The increase in Accounts Payables will increase the amount of current Cash and the decrease in the Accounts Receivable will increase Cash. One item that is often overlooked is Purchased Assets. When a business acquires a new asset, it reduces Cash or it creates an increase to Accounts Payable, in either case reducing Cashflow.
The overall importance of this is that you always need to focus on Cashflow. If you have a state of rapid growth, sales and Accounts Receivables go up, which decreases Cashflow. Now you probably need to hire more staff to handle the increase in sales, you need to purchase more fixed assets to outfit the staff, you need to purchase new equipment to meet the rapid growth in your company, which all decrease cashflow. You have to purchase more raw materials to manage the growth, which decreases cashflow. If collections are slow, for example, and instead of collections in 30 days now it’s closer to 90 days, you’re in need a world of hurt. You can factor your receivables for pennies on the dollar or you can attempt to borrow from your bank, but that may take 90 days for approval and funding and BOOM! Before you know what happened, you are OUT OF BUSINESS. Be very careful managing your Cashflow, as it is the lifeblood of your company.
Call Brent 480-250-6559 or via email brent@arraybsa.com, to get detailed assistance in building, streamlining, and developing your business to the point of being sellable.
Brent is the Founder of BounceU a children’s entertainment franchise system, entrepreneur, Certified Public Accountant licensed in CA, and Business Broker in the Phoenix area. He resides in Gilbert, Arizona with his wife and children. Brent is an avid cyclist and outdoor enthusiast.