Exit Planning Newsletter for Business OwnersExit_Planning_Newsletter_for_Business_Owners.html

In the previous issues of this newsletter, we outlined two of the four areas where business owners who want to both survive in today’s economic climate and emerge from it poised for growth (or sale) can focus their energies. As you may recall, the areas we have already talked about are creating value and creating revenue. Today, we discuss the third area: quantifying cash flow.

As you consider ways to meet today’s economic challenges, a vital first step is to focus on company cash flow.

What do we mean by cash flow? The amount of cash left over after the company has paid its expenses. Common add backs to cash flow include:

  1. BulletExcess Compensation

  2. Tough Times Crown Cash Flow As KingShareholder Distributions

  3. Time: Too Much or Too Little?
Active business owners seldom slow down. We all know that the only things likely to reduce your pace are death or terminal burn-out. This is not to imply that you are not well intentioned; quite the contrary. You are so well intentioned that you’ve taken on more tasks than you can possibly complete.Owner Perks

  4. Indecision: The WRONG Decision
“I haven’t decided what I ultimately want to do with my business, or when I want to exit, or how much money I’ll need, or whom to sell to, so how can I plan my exit? Besides, I don’t want to exit right now.” If you’ve said this, or thought it, you are not alone. Many business owners are either overwhelmed with the thought of exiting or are so busy fighting daily business fires that they think they cannot plan their exits.Retained Earnings Additions

  5. Meet Today's Challenges and Exploit Today's Opportunities 
Over the past few months we have shared with you a number of ideas about how you and your company can approach both the challenges and the opportunities that this economy has thrown at all of us. We’ve discussed specific issues such as fraud, and more general issues such as preserving value, focusing on cash flow, increasing revenue and keeping all actions consistent with your ultimate goal: leaving your company when you want, to the successor you choose, for the amount of cash you want or need.Depreciation and Amortization deductions


We recommend that you take a hard look at your company’s monthly cash flow statement. Do you really understand what it is telling you? Today every owner must become an expert in reading cash flow statements. If you are not as comfortable with your company’s financial statements as you are with your favorite novel, ask for help. Your CPA can quickly teach you to “read” or analyze your financial information so that you can quickly determine, on a monthly basis, your company’s cash flow.

Why is cash flow “king?”

Cash flow has always been hugely important in both running a successful company and in orchestrating its successful sale, but today cash flow is king. Why?

  1. 1.Cash flow is the lifeblood of a company. Owners must understand —and be able to measure —where cash comes from and where it goes. It is an accurate indicator of the financial health of your business. Unlike more subjective measures, it makes no assumptions and entertains no preconceptions.

  2. 2.For the reason stated above, cash flow is a critical component of what your bank wants to see. Unless you are able to accurately establish current cash flow, banks will be reluctant to grant or renew financing.

  3. 3.Quantifying exactly how the current economy has affected your company’s cash flow (as opposed to just revenue) provides a credible way for you to predict the impact of further expense reductions, strategies to improve revenues or strategies to improve gross margins. If you don’t know —at this moment —your company’s cash flow position, you cannot effectively manage your company and you can’t predict or project future cash flow.

  4. 4.The financial reason you are in business is to grow shareholder value. Shareholder value grows as cash flow increases.

  5. 5.In troubling times, employee fraud (such as embezzlement of company funds) tends to increase. The best way to detect fraud is to review cash flow/financial statements on no less than a monthly basis. We are assuming, of course, that your company is producing monthly financial statements. Anything less frequent than that and you run the risk of not reacting to something that “isn’t quite right” as quickly as you should, and not knowing where your business is or where it’s heading.

Once you’ve got a handle on current cash flow you need to create, based on today’s economic climate, a projection of future cash flow. Begin with an accurate picture of current cash flow. Then, create three projections: one for the best-case scenario, one for the worst and one for the likeliest scenario. All of those projections should include assumptions about:

  1. Fraud - Do you know it when you see it? 
The subject of employee dishonesty is a delicate one. Owners generally want to trust their employees, and given all the other battles owners fight on a daily basis, they are often not as vigilant as they can or should be. Vigilance requires an investment of time and money in return for an uncertain payoff. So let’s look at a typical fraud scenario. Customer Expectations/Policies

  2. Preserve and Protect Your Business On All Fronts 
We kicked off our discussion with the final item — creating value — because today, most owners are so focused on cutting expenses and minimizing risk and taxes that they’ve ignored their ultimate goal: creating a company with enough value to leave it for an amount of money that will support them — in style — for the rest of their lives. Supplier Options

  3. Actions of your Competitors

  4. Exit Planning Newsletter for Business OwnersProfitability

  5. Time is Essential in the Transfer to Insiders
In this series of articles about transfer to insiders, we identified a number of elements that are part of the well-designed transfer to insiders. The first element we identified was the qualifier: Time.Pricing

  6. Elements of a Plan to Sell to Insiders
In the previous issue of this newsletter, we compared the attributes of sales to third parties to those of transfers to insiders. We looked at the often-overlooked risk involved in third party sales and the equally overlooked benefit of owner control and payoff in insider transfers. Product Lines

  7. Equipment Replacement


Keep in mind that your employees may not be able to create these projections. They may have their hands full managing the day-to-day issues. If that’s the case, seek the help of your CPA, or consider hiring someone on a temporary or project basis. These projections are simply too important to put off until next week, next month or next quarter.

In the next issue of this newsletter, we will talk about how you can use cash flow as a tool to predict the efficacy of strategies designed to preserve and protect value.

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