Kenn Saddler, a B2B CFO partner, talks to 'The Alternative Board' about the importance of cash flow in operating a business. As Ken says, "It's all about the cash."

1. It’s All About the Cash
The Alternative Board
Ken Saddler, MBA
Partner
B2B CFO®
February 8, 2012

2. Financial Statements
Profit and Loss
Sales
- Cost of Product or Service
Gross Margin
- Operating Expenses
Operating Profit
+/- Other Income / Expense
Income Before Taxes
- Taxes
Net Profit  to Balance Sheet
Retained Earnings in the Equity
section

3. Financial Statements
Profit and Loss
EBITDA = Earnings Before Interest,
Taxes, Depreciation and
Amortization
Why is this so commonly used in
business?
What does discounting mean?
Which line on the P&L is the closest
to EBITDA?

4. Financial Statements
Balance Sheet
Assets Liabilities Owner’s Equity
+ Current Assets + Accounts + Stock
+ Other Assets Payable + YTD Net
+ Fixed Assets + Short Term (< 1 Income
= yr term) +
- Accumulated + Retained
Depreciation Obligations Earnings
= Net Fixed Current Liabilities - Owner
Assets +Long Term (> 1 Distributions
Total Assets yr term) Total Owner’s
Obligations Equity
Total Liabilities

5. Balance Sheet Metrics
Current Ratio = Current Assets / Current Liabilities
– Measures a company’s “liquidity”
Accounts Receivable Days (a.k.a. DSO)
A/R / Sales * 365
Accounts Payable Days (a.k.a. DPO)
A/P / Cost of Goods Sold * 365
Inventory Days (a.k.a. DOH)
Inventory / Cost of Goods Sold (Annualized) * 365
Return on Assets
Net Income / Total Assets

6. Valuing Your Business
Many valuations and pricing of deals are
done as a multiple of EBITDA.
• Discounted cash flow analysis is generally applied at the
buyer’s cost of capital.
Price = 3 – 5 yr historical Trailing 12 months
EBITDA average X Industry average multiple
* / (1 + r) n
Equity = Price
* This number is negotiable depending on a number of factors that can help you increase the value of your
company.

7. Valuing Your Business
Other Types of Events to Consider
– Asset sales
– Debt assumption
– Recapitalization
– IPO

8. Valuing Your Business
What can you do to increase value?
– Prepare monthly financial statements and use
them to help guide decision making and run the
business
– Present audited or at least CPA reviewed financial
statements prepared under the accrual method of
accounting
– Deliver consistent revenues; growth is a plus;
have a strong brand
– Deliver a consistent trend of positive EBITDA and
cash flow
– Expand EBITDA faster than sales

9. Valuing Your Business
What can you do to increase value?
– Clean up your balance sheet
– Build a strong, knowledgeable, loyal team
that will help the business to continue
successfully after you exit
– Reasonably diversify products, customers,
and vendors
– Invest in a strong ERP system
– Operate with repeatable, well documented
processes
– Reduce debt

10. Valuing Your Business
What will reduce value?
– Problems on the balance sheet, especially
if not immediately disclosed to potential
buyer
– Running the business exclusively to
reduce the tax liability
– Taking excess distributions, particularly in
the most recent years
– Too much reliance on a one or two key
customers
– Reliance on tax returns as financial

11. Valuing Your Business
K.I.S.S. Approach
• Net Income, EBITDA, Retained
Earnings and Equity are inextricably
linked
• Focus on the few things in your
business that will increase these
accounts
• Your business will be more valuable
• You will receive a higher price on your
exit

12. Obtaining Bank Financing
Checklist
1. The Opportunity
2. The Company and its History
3. The Industry
4. The Strategy
5. Interim Financial Statements
6. Annual Financial Statements
7. The Forecast – next 12 months plus years of loan request
8. Corporate and Personal Tax Returns for 3 Years
9. Personal Financial Statements of Owner
Recommend CFO meet with bank prior to owner’s first
meeting to gain intelligence and receive feedback.