Both companies have completed their revenue forecasting for the next 18 months and are seriously considering working together in a merger, a simple sublease or another strategic alliance arrangement. As you might imagine in such situations, there’s been some interesting discussions on the related values of the contributions and projected revenue of both companies—especially when it comes to cash flow, which, in today’s commercial world, is very important to business survival.
Since the SPDC has multiple graphs, financial indicators and cash flow metric protocols, Escape and PowerPlay are trying to decide which charts are the most important.
Business development principles: Financial tools
One important financial tool for a business with accounts receivable, accounts payable and inventory is this financial metric chart (Figure A, below), which shows the relationship between the three.
A second financial tool concerns the relationship between working capital and solvency, as shown in Figure B (below). As you might imagine, financial solvency is critical, since it reflects the company’s ability to pay its debts and stay in business.
Figure B:
Time to dig deeper
Both companies have focused on the family fun industry, and there’s some concern about dilution of each company’s cash flow by sharing or allocating revenue streams to the other. So, although each company understands the benefits of joining forces, there are still some ego issues and trade-off evaluations as compared with each company simply paying its own full month-to-month expenses. The function and advantage of the SPDC is, they give business owners the necessary information to accurately and quickly analyze their business’ financial health.
Do You Have the Answers?
Test yourself here and then find the answers and further discussion at www.northbaybiz.com or email consultants@californiabusinessdevelopment.com.
1. Which of the two charts gives a better indication of business financial health?
a. Average days, receivables, payables and inventory
b. Solvency ratio and working capital
c. Simply the amount of money a business starts with
2. What’s the most important indicator of a business’ opportunity to succeed?
a. Cash flow
b. Money in the bank
c. The business idea
a. Receivables more than payables
b. Payables more than receivables
c. Inventory more than payables
Can you advise these two companies how to "play nice" together?
