Why Cash Flow?

Recent accounting scandals only re-emphasize the need to focus on cash  - "Cash is King".  One rule of thumb that you can rely on is that "Cash is King" (most rules of thumb are either wrong or dated).

Net cash flow from operations should be your fundamental yardstick in (i) measuring the value of your business, (ii) determining the amount you are willing to pay for an existing business, and (iii) considering possible business improvement options.

Your business is fundamentally no different than any other investment - whether a personal CD, bond or stock investment; whether the business is a sole proprietorship, private corporation or publicly traded corporation; and whether the business is US or internationally based.  Take a bond as an example.

When considering the value of a bond, whether publicly traded or privately held, you pay a fixed amount and receive a series of future cash payments.  The fixed amount you pay is the present value (e.g., today's value at the point of decision) of the future cash flow stream.  In calculating the amount you should pay for a bond, an interest rate is assumed for present valuing purposes.  This assumed interest rate is based on the inherent risk of the bond.  The higher the risk, the higher returns investors will require in an efficient market. 

The US Government bond market is perhaps the most efficient interest rate market, and the yields on US Government securities are typically defined as the risk-free rate.  A rational investor would only invest in risky ventures yielding more than the risk-free return, with the return exceeding the risk-free return compensating the investor for assuming the additional risk.

Just like a bond, an investor in a business, asset or any other commodity expects to receive his investment back and a cash return.  Any other benefits of investing in the asset / project (whether perceived or real to the investor) are not compensated for in an efficient market.  Cash is King.

Unlike net income and other accounting line items which have been so easily manipulated in recent history, only an accurate representation of business cash flow allows accurate control and planning.  All the cash impacts of a venture can not be obtained from audited (or unaudited) financial statements nor a simple profit and loss statement typically used by many businesses.  A full GAAP-based historical representation of business performance on a cash flow basis and a forward looking analysis of alternative growth options which considers tax impacts is required.

Middle South Ventures, Inc.

2895 Hwy 190 - Suite 214

Mandeville, LA 70471

985.727.3220 - 985.727.3236 - fax

800.782.1417 - 985.778.9898 - cell

Trade Marked 2001 - Middle South Ventures, Inc. - All Rights Reserved