Value Builder Series: Factor 4 – Valuation See-saw
The Valuation See-saw reflects the impact your cash flow and profitability have on the value of your company. Imagine a playground see-saw that can move in only two directions: when one end goes down, the other must go up. The same is true of the value of your company as it relates to your cash flow: the more cash an acquirer must inject into your company when taking it over, the less that acquirer will pay for it. The inverse is also true: the less cash your acquirer must deposit into your business, the higher the price he or she will pay.
John Warrillow explains the Valuation See-saw in this short video.
Your goal should be to create a business that accumulates cash as it grows. One way to do this is to create a positive cash-flow cycle by getting customers to pay you sooner while you lengthen the time it takes you to pay your expenses. In addition to maximising your overall profitability, having money in the bank makes running your business that much more enjoyable before you sell.
How do you typically get paid by your customers?
- Billed after delivery
- Deposit plus final payment
- Staggered billing
- 100% when customer buys
Consider the following questions with your Business Doctor:
- If you invoice your customers in installments, could you charge them a greater percentage of the overall price up front?
- Could you evolve your business into a subscription or membership model in which you invoice customers before they receive the benefits of their membership or subscription?
- If you sell a service, could you do more to ‘productise’ your offer and thereby make it easier to charge up front?
- Could you reduce the amount of stock you pay for in advance of needing it?
- Could you lengthen the time it takes to pay some suppliers?
What is the next step?
There are 8 factors that drive that value of a business. Complete the Value Builder Survey now to find out your overall score then attend our Business Builder Workshop to find out how you can improve the value of your business.
Set aside 15 minutes to complete the Value Builder Survey.
Why you should do the Value Builder Survey:
Watch this quick video to find out why your Value Builder Score matters.
Credits and notes: The information in this article is by John Warrillow. The Value Builder Score has recently been renamed from Sellability Score to Value Builder Score.
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