==== ====
Thank you for visiting. Please visit our link for additional resources:
http://b6472kiquy3zolq4ntojhr4x4w.hop.clickbank.net/
==== ====
There's one very important lesson I learned while earning my MBA, which I keep in mind in my
personal life. When valuating a business, figuring out what a company is worth, there are a
couple of different ways to come to a figure. The easiest method is calculating the fair
market value of all of the company's assets, subtract its debt, and the difference is its
value. You can also look at accounting ratios and future earnings, and then it gets really
complicated. But the best way to know if a business is worth buying is by analyzing its cash-
flow and how easily it generates free cash. When payroll is paid, when your accounts payable are
up to date, is there still cash left in the bank? Is the cash reserve increasing over
time? I think the best way to valuate a business is by looking at its free cash flow.
Suppose you are evaluating a potential purchase of a restaurant. The current owners
invested over a million dollars in the kitchen and dining room, but it makes no cash profit. Is
the restaurant worth a million dollars, as the value of its assets would suggest? Certainly
not; not if it does not produce cash.
There are many businesses that have great ideas, develop excellent products, and generate
healthy revenue, but they fail because they run out of cash. In fact, the number one reason
small businesses fail is running out of money, and the second reason is that management doesn't
know how to manage their cash and raise capital.
Everything I just discussed about businesses and cash also holds true for individuals. While
looking at your balance sheet from time to time is prudent, to gauge your net worth, looking at your
cash position constantly is more important. You can own lots of real estate, cars, boats, and
have a lavish lifestyle, but as soon as you run out of cash it all goes away very quickly. A lot
of people live lives they can't afford and don't even realize it because it's all financed and
mortgaged off to the bank.
Let's go back to the business analogy for a second, and I'll give you an example. Let's
compare company A and company B. Company A is a small furniture manufacturer. It
purchases lumber from a mill on credit, due 30 days. Its biggest customer is a large
multinational retailer, and it pays for the furniture only after it has been sold to the end
customer. Therefore, the inventory is owned by the manufacturer until it is sold, sometimes
longer than 45 days after it's made. The company makes payments on a small building, and
also financed the capital equipment used to manufacture the furniture. Employees are paid
bi-weekly. On the balance sheet, the company owns $1.5 million in assets, while it carries
$1 million in debt. It has a net worth of $500K. It enjoys a healthy profit on its
furniture, but sometimes the product sits on shelves for up to 60 days before being sold. By
the time the retailer transacts a sale for one dresser or armoire, the company has had to pay for its
supplies two times, and pay its employees 4 times, sometimes running out of cash. Often,
the company resorts to borrowing money from the bank to meet its payroll
obligations. Harsh reality, but it happens.
Company B is an internet reseller. It displays items on its website for other companies,
brokers the deal, and charges its internet customer a very small margin over the cost of the
product. The products ship directly from the manufacturer. The company owns no
inventory, no manufacturing site, and has less than 15 employees. It collects payments from
its customers through credit card transactions, which are deposited into their account within 3
days. But it pays its suppliers after the products are received, sometimes up to 15
days. Since the company doesn't own any inventory, warehouse, or capital equipment, its
balance sheet is very small. However, because it collects payment faster than it pays its
suppliers, it accumulates cash in the bank. The company never has any problems paying its
employees or suppliers on-time.
If you could be owner, which company would you choose to run? Wouldn't you feel more
comfortable and have more piece of mind running company B?
Personal cash-flow is just as important and necessary to having piece of mind. Imagine not
having to worry if your mortgage will be late this month, or if you have enough cash in the bank to
pay for your weekly supply of groceries. Ever walked up to an ATM machine wondering how
much cash you could withdraw without taking too much and then bouncing a check? How
long would your utilities and creditors keep accounts open with you if you could not pay them on
time every month? It's not only how much you make, but how much cash you have on-
hand. Even highly paid professionals can get into financial trouble, and eventually fall into
bankruptcy for protection from creditors.
The take-away is that in business just as in your personal life, cash is king. Cash rules, and
income is not as relevant when it comes to measuring or generating wealth. Higher incomes
may appear to generate more wealth, but ultimately it comes down to how well you can manage
your cash flow and generate free available cash.
About this Author
Ernesto Sidi is the author of Cash Rollercoaster, a personal finance how-to book written for the
working American. Not a get-rich book, it emphasizes strategies and methods for optimizing
personal cash flow and avoiding the cash rollercoaster (repeating cycle of high on pay day, out of
cash two weeks later), plus advice for paying bills on-time, avoiding overdrafts and late fees, and
using leverage to create cash flow and wealth. For more information about the book, or to read
other personal finance articles by Ernesto Sidi, visit http://www.pay-bills.net
Ernesto earned his Master's in Business Administration (MBA) in 2004 from Keller Graduate
School of Management. He received his undergraduate degree in Electronics Engineering
Technology from DeVry University in 1993.
Article Source:
http://EzineArticles.com/?expert=Ernesto_Sidi
==== ====
Thank you for visiting. Please visit our link for additional resources:
http://b6472kiquy3zolq4ntojhr4x4w.hop.clickbank.net/
==== ====