Question for Business Class

Discussion in 'Growing and Managing a Business' started by gsdikun, Jul 16, 2013.

  1. gsdikun

    gsdikun
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    Hello,

    I'm a university student considering a major in business. I'm in a business class and the professor, gives "puzzles" at the end of each class. Since I'm not very knowledgeable in business yet, most of them are over my head, so I was wondering if anyone here could help me on this one.

    You're a business incubator, and you're given a list of potential businesses. Each one has a sale value (price of the business), a revenue value, and a cash flow value. How would you make a decision based off these values? (Or how are these values relevant to your decision?)

    Example: Sale Price: $2,300,000. Revenue: $200,000. Cash Flow: $150,000.
    Sale Price: $4,500,000. Revenue: $2,600,000. Cash Flow: $0.
    Sale Price: $175,000. Revenue: $52,000. Cash Flow: $51,000.

    Any advice would be great, thanks!
     
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  2. Fergal

    Fergal
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    Cash flow is vitally important. A business that has a high sales value and high revenue, will not be able to pay their rent if they have a negative cash flow. Does that help answer your question?

    By the way, welcome to Business Advice Forum, it would be great if you could tell some of your class mates about our site :)
     
  3. Business Attorney

    Business Attorney
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    As Fergal said, cash flow is critically important. However, particularly in a startup, current cash flow may be deceptive. The company with the best cash flow may be a small business with no potential to expand significantly, while the business with no cash flow could be the next Facebook or Google, just getting off the ground.


    The raw numbers are instructive, but in a vacuum do not provide much real guidance.
     
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  4. ArcSine

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    (emphasis mine). Indeed! If those stated cash flow numbers are simply those for the most recent fiscal period, or perhaps an annualized extrapolation of the flow rate as of today, the numbers don't tell much at all. Fergal is spot on that cash flow is critical, but further it's (as Business Attorney points out) the cash flow pattern expected to materialize over the upcoming quarters and years.

    One would hope that those quoted sale price numbers have already subsumed a reasonable valuation based on the cash flow potential, thereby making them reliable statements of the companies' estimated values, and hence making them useful for the incubator's purposes. But the "I'll believe it only when I see it" rule should be followed before making any such assumptions.

    All that aside, though, Fergal brings up a good separate point regarding current liquidity...aside from long-run valuation questions, the day-to-day ability to meet the operating bills and payroll is important. Theoretically, having a high value arising from attractive cash flow potential should spawn easy access to quick capital sources in order to eliminate worries about keeping the lights turned on, but it doesn't always pan out that way. The incubator's analyst will certainly want to consider this issue as well.
     
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  5. Wofiosdeigh

    Wofiosdeigh
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    That all seems not good
     

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