How Can Working Capital Management Help You Happily Accept A Lower Price For Your Business?
Big businesses frequently have an individual whose only responsibility is working capital management. It can be so important to their overall levels of investment. It can help them do more with less. Or lots more without additional working capital investment.
At that level their objective is to maximize the return on invested capital by using less capital. The same financial return from less invested capital can produce an improved result. And at the same time it will allow them to reduce their use of their bank line.
You can do the same thing. As you apply yourself to working capital management, you will be able to reduce your cash requirement for working capital. And whether your business relies on the Bank of You, or the bank down the street, the net result will be positive.
If your business depends on the Bank of You, careful but proactive working capital management will enable you to draw funds back from your business. This will essentially allow you to derive a return on and from your business before selling it. This will allow you to reduce the purchase price of your business by the amount of cash you can withdraw as a result of this active management. So you will lose nothing. A purchase price reduction will make it easier for prospective buyers to buy.
Now for a brief discussion on how to do this. What are the key components of working capital management? Those where the pay off for intensive management is great will vary depending on the type of business, and the state of the economy. And an intensive program will not necessarily work for every business.
The most common areas for consideration are inventory, accounts receivable, and accounts payable. There is little mystery involved. Can inventory be reduced without adversely impacting sales? If so, there is likely an opportunity. Can the average age of receivables be reduced without adversely impacting sales? If so, there is likely another opportunity. Can the average age of accounts payable be increased without adversely impacting supplier relations? If so there is likely another opportunity.
Your own business may well offer other opportunities. Explore them to see what can be achieved. However, in all of this, avoid being ruthless to the point of damaging important relationships. In particular, remember that satisfied customers are your most valuable assets. You can insure against the loss of hard assets, and usually replace them with ease. You can't buy insurance against the loss of customers, and replace them easily.
This is not intended to be an exhaustive discussion on the subject of working capital management. It is intended to get you thinking about what is possible in your own business. What can you do to draw cash from your business before selling it, and in a way that doesn't reduce its value? And will reducing the selling price by the amount of the cash withdrawn make it easier for prospective buyers to come up with the cash they need to complete the acquisition?
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