3. Profit is an opinion. Cash is a fact.

Profit is an opinion. Cash is a fact. 

And the difference lives on the balance sheet, the part of the books most owners never look at and every serious buyer examines for hours. 

Host John Lay, founder of Three Circles Agency, gives a plain-English tour of the  statements every buyer reads and, then, goes below the income statement into the  pages that quietly kill deals. He shows why a profitable business can be cash-starved and unsellable.

Sources:

• Sloan (1996), The Accounting Review, accruals less persistent than cash earnings. 
• Richardson, Sloan, Soliman, and Tuna (2005), Journal of Accounting and Economics, less-reliable accruals predict lower earnings persistence. 
• Deloof (2003), Journal of Business Finance and Accounting, faster collection and shorter cash conversion cycle associated with higher profitability; less profitable firms wait longest to pay. 
• Petersen and Rajan (1997), Review of Financial Studies, trade credit is the single largest source of short-term finance; firms lean on it more when bank credit is unavailable. 
• Baños-Caballero, Garcia-Teruel, and Martinez-Solano (2012), Small Business Economics, SMEs steer toward a target cash conversion cycle; working capital and firm value follow a non-linear curve with an optimal level. 
• Minnis (2011), Journal of Accounting Research, verified financials lower a private firm’s cost of debt.
• Cash conversion cycle = DIO plus DSO minus DPO. 
• Illustrative ranges vary by industry. 
• Net-working-capital peg and post-closing true-up (typically 30-90 days), with price adjusting dollar-for-dollar; disputes cluster around AR collectibility and AP classification.

Disclaimer. Job or Asset is produced by Three Circles Agency (TCA) and is provided for general informational and educational purposes only. It does not constitute, and should not be relied upon as, legal, tax, accounting, financial, investment, valuation, or medical advice, and it is not a solicitation or offer to buy or sell any business, security, or financial product. Listening to this podcast, contacting TCA, or downloading any TCA material does not create an attorney-client, accountant-client, fiduciary, broker, or advisory relationship of any kind. TCA is a business-consulting firm. It is not a law firm, accounting firm, registered investment adviser, broker-dealer, or licensed business broker, and it does not provide legal, tax, or investment advice. Always consult your own qualified, licensed professionals before making any decision regarding the purchase, sale, financing, structuring, taxation, or operation of a business or practice. Statistics, multiples, interest rates, and figures mentioned are believed accurate as of the recording date but are general in nature and subject to change; they may not apply to your situation. Academic research is cited to illustrate ideas and mechanisms; practitioner and industry figures are estimates that vary by business, market, and time. Any client examples are illustrative composites and do not depict real, identifiable clients. The views expressed are those of the host. TCA makes no warranty as to the a...