The risk in your company can be measured by what would happen if: You as the business owner became sick and was out of action for several weeks; or you lost the company’s biggest customer; or you lost your major supplier you lost one or more key employees.
The higher this risk, the lower the company value and for a business owner who want to sell the company, steps should be taken to reduce these risks and increase the company value.
A purchaser of a company should consider the following: The risk of the company under consideration must be ascertained and accepted; and this risk can generally not be discovered from a reading of the financial statements.
When you’re looking to buy a company, you’ll of course consider the various attributes of the organization, both financial and otherwise. However, it’s important that you understand your own personal needs and objectives and how a particular company will meet these. A key consideration is how much you wish to be involved on a day-to-day basis. You may wish to ask yourself the following questions. Are you buying a business where you will be very involved and where your daily presence is required, i.e. essentially providing you with a job? This a company you work IN. Or, are you buying a business that operates largely independently of you as its owner? This is a business you work ON.
It is possible that you expect to transition your involvement over time. For example, if you’ve worked in a particular service-area or profession for many years, you may be interested in purchasing a company in keeping with this experience. You may expect to have a fair level of involvement initially (working IN the company) but with growth and company development, you’ll role will be less embedded (working ON the company). Likewise, you may have the skills required to buy a “fixer-up” and turn it around, you’ll likely start with a high level of day-to-day involvement and as the company turns around, move from a working IN situation to a working ON situation.
Revenue is vanity, profits are sanity, but cash is king. Here are three reasons why a business owner should forecast cash flow: 1. Growth. A cash flow forecast allows your business to grow as quickly as you can afford to and prevents you from growing faster than your cash allows. 2. Control. Many things in your business are outside your control e.g. certain costs, regulations or taxes. However, you do have control over some matters such as the collection of accounts receivable which can greatly affect cash flow. 3. Course correction. A good cash flow forecast will allow you to make changes proactively if updated cash flow projections predict a slowdown.