Let's talk about the three financial drivers that drive the value of your business. This week, I continue with my masterclass series on building value in your business. My goal in this series is to give you the frameworks and focus you need to systematically increase the value of your business; because all business owners must exit at some point. Why not prepare for it?

In today’s column, I want to focus on 3 drivers that define the quality of your business finances.

The first driver is your financial performance.

Let’s deconstruct financial performance. This is where we're talking about top-line revenue, bottom-line profit, and the quality of the reporting. Most businesses have a good sense of what their top-line might be; and many have a good sense of their profit margins. Depending on how you've been running your business, (particularly if you’ve been running more of a lifestyle-oriented business, where you still have some degree of overlap between your personal benefits and your business benefits) you will need to ensure that you are tracking your metrics with rigour.

If you're looking to sell your business, or if you'd like to have your business be valuable in the eyes of an acquirer in the future, you want to have verifiable revenue and profits. This might mean getting audited financial statements regularly, or being in a position where it would be simple and straightforward to audit your financial statements as needed.

At its core, financial performance involves dealing with dollars and cents. So get ready to dive into the details where applicable.

The second driver is the quality of your revenue.

Ideally, you want to have as much recurring revenue as possible in your business. The quality of recurring revenue is defined, quite literally by how much of money (in and out of your business) is re-occurring or recurring.

If your business is designed for “consumables”, like one-and-done products or services, then you're always searching for the next customer to buy what you sell. But if you have something in your product or service base that is used on a regular basis, from a consumer standpoint: think razors, or toothpaste, or toothbrushes. On the service end of the scale, think about cleaning your office building, or ordering food for an event business, that would be the first rung of recurring revenue. Because these deliverables need to be replaced on a regular basis.

When you think up one level, consider sunk costs consumables. Let’s continue with our examples of razors and toothbrushes. Perhaps you’ve got an electric toothbrush or razor, and every so often you have to replace the brush-head or blade. You do not have to replace the part that plugs into the wall that creates the power. In these cases, there is an initial upfront product that is purchased (the device).This is a ‘sunk cost’. You buy the main handle and have to replace the blades; and that's how you know, from a business perspective, how you're going to receive ongoing revenue from a customer. This helps you start to predict, or account for, that revenue on a regular basis. On the service end of the scale, think about a regular cleaning service for your office building, or food service for your event business, or even banking and financial services that are charged at a recurring minimum amount to individuals.

The third driver is cash flow sovereignty.

We know that strong cash flow is important for any business. You can be profitable only when you are in cash flow. Cash flow negative essentially means you are in a slump from a cash flow perspective, and that could put your company at major risk. If you want to have a cash rich exit, you must ensure your business is generating solid cash flow, which is indicated by the fact that you're able to take out profits to put into your own personal assets as bonuses, dividends, or an alternative (over and above your salary). Your business also needs to be able to continue to fund itself. A question asked here often is: how much money does the business owner need to infuse into the business in order for it to continue? The stronger your cash flow is, the smaller that second number is going to be. And the more valuable your business is going to be in the eyes of a company or an individual who comes in to buy it.

If you enjoy the audio medium, you’ll find a lot more in the podcast episode here. Have a listen! 

If you are looking to make a cash rich exit from your business in the next 5-10 years, please continue to make time for this series. We have 7 more columns coming up over the next 2 months. This Value builder masterclass series is sponsored by “Elevated Conversations” with me, Colleen O'Connell Campbell, a roundtable mastermind for co-founders and business owners who want a cash rich exit in the next five to 10 years.

An invitation to an Ottawa community.

If you’re in Ottawa, you may be interested to hear that I'm reintroducing “Elevated Conversations” which originated in 2018 where I brought together smart investors and business owners to talk about interesting topics in technology and finance that were disrupting our world. With COVID and the end of dinner parties, we moved to virtual roundtables and now I’m bringing back masterminds in person

The event is on October 26, 2022, and is by invitation only.

Let me know via LinkedIn or email if you’re interested, and I’ll send you more information.