Working Capital Tools for Successful Business Performance (Segment V)
Credit: Donald J. Sauder, CPA, CVA
Looking Towards the Future
Working capital management is imperative to successful entrepreneurship because agreement on its relevance is a real deal when transitioning business ownership. Working capital requirements are often a key valuation feature in business exits.
Let’s look at some relevant marketplace data from Keystone Business Transitions for confirmation:
- You are far from the only fish in the sea. Estimates indicate that there are approximately 7.5 million business owners in the United States, and 65% of survey respondents planned to leave their company within a decade or less. That could result in a glut of companies on the market, driving down valuations and giving new leverage to buyers.
- If you are a Baby Boomer (born between 1946 and 1964) the generation following you is not nearly as big so expect far more sellers than buyers in the marketplace. This too, adds to the glut.
- Even during boom times less than half of the owners who tried to sell their business actually were able to sell.
- Unless your company is superior to its competitors because there’s something about it that a buyer can use to make more money than you do (or other businesses in your industry do) a rising tide is going to lift you only as much as it lifts that glut of competitors.
If three out of every five businesses plan to sell in the decade, the a superior business should have adequate working capital levels to gain an edge in the increasingly competitive transaction marketplace.
If your business lacks adequate working capital, at best, your business will only confabulate with regards to exit planning because it will not have the cash available to appropriately prepare qualified successors for ownership, e.g. adding and developing partnership/successor trainee(s), or pay advisors to gear-up the business for a successful sale, and further, substantiate that your business has an appropriate [any] value for a vertical or horizontal industry integration, i.e. even the tykes like the big fish; and those small fish, why bother right?
Entrepreneurship can be likened unto the Parable of the Talents in Matthew 25. Your business is an alike talent. There is risk, but if you’ve counted the cost, and faithfully apply your expertise, there are often rewards, i.e. your working capital levels will flourish. Similarly, your working capital levels will likely lead to entropy if you or your employees do not put diligent effort forth to continually develop the business.
It is advised to measure working capital levels, i.e. how many fish you have, and how many fish you need for the month, to keep the business continually flourishing financially. If your business faces continual pressures on working capital levels, your advised to get advice [early] on how you too can develop adequate working capital balances with improved business processes, communications, and strategies for successful business performance, e.g. acting [quickly] on working capital concerns improves your probabilities of being a long-term profitable servant.
Businesses succeed because of others, i.e. customers and clients. Some businesses cajole for development, and for others, “Honor lies in honest toil” to quote Homer. Yes, absent a customer(s) or client(s) to transact with in the marketplace community, their would be no business at all; people needs businesses, and businesses need people. Every big fish, began as a small fish, and the big fish are the result of a conducive environment i.e. working capital levels always sustained developments.
While the unprofitable servant likely didn’t realize he should pay an advisor, in addition, he took zero action towards profitability. If you’re investing in your future and your businesses future, you’re likely not an unprofitable servant.
Working capital and sparkling water have shared a value. Too few realize how precious it truly is. Effective management of working capital and the effective management of operating capital and the cash flow cycle is imperative for successful business performance, e.g. the fish will flourish and you will too.
Adequate working capital is your businesses sparkling well. If you’re one of three out of five entrepreneurs transitioning ownership in the next ten years, you’re now advised why you should start investing in the necessary financial tools to measure and manage working capital.