Most business owners understand the importance of growing their company’s value. However, many of them don’t realize that they aren’t increasing the correct type of value.

In Season 6, Episode 44 of The Making Bank podcast, Ryan Tansom explains growing long-term value. Ryan started his entrepreneurial career as the executive vice president of his family business that sold copiers. The business started with Ryan’s dad buying a truck full of copiers to sell them. Together with his father, they grew the company for six years to peak at 21 million in revenue. However, when it came time to sell, Ryan had to let go of the majority of his employees and was then left without a job. In 2014 Ryan took his experiences and co-founded Arkona, an international growth framework whose mission is to help business owners develop a long-term value for their companies through Value Growth Education and Strategic CFO Services.

The Ignored Financial Statement
Ryan talks about the three financial statements on the podcast: your income statement, balance sheet, and cash flow statement. While the three statements are tied together, a lot of entrepreneurs completely disregard their cash flow statement. That’s why so many don’t know how to develop the value of their companies in the long run.

Often you’ll find business owners focusing on their top-line growth. They put in the work to grow their annual revenue and, in turn, think that they’re increasing their company’s value. While it’s essential to sell more and scale your business, your annual revenue does not develop long-term value. The most successful business owners don’t only focus on increasing their yearly revenue but on growing their company as a valuable asset. Ryan explains that your company’s value is tied to how sustainable, predictable, and transferable your cash flow is, and it’s not directly correlated to your revenue.

Importance Of Cash Flow Statements
What makes the cash flow statement so important for determining a company’s value? Ryan explains what’s called CFO or Cash Flow From Operating Activities. In your cash flow statement, your net operating cash flow essentially details how much money has come into the business and how much is left over. A company’s CFO is in the first section depicted in their cash flow statement, and it provides an account for the total amount of money that has been transferred in and out of the business. Net operating cash flow is important because it allows business owners to track where their money comes and goes and helps them understand how much money they need to generate in order to keep the business operating efficiently. The cash flow statement is so significant because the CFO allows business owners to determine the financial success of their company’s core operating activities.

The Types Of Value
When it comes to growing value, you can break it down into intrinsic financial value and strategic transaction value. A company’s intrinsic financial value is based on how much that company is worth as an asset. You can use your company’s cash flow to affect your company’s intrinsic value. However, your company’s strategic transaction value is your company’s worth to a strategic buyer. This value is based on how much a strategic buyer thinks your company is worth. It usually comes with a premium or a discount on your company’s value, and this is because it’s based on other factors such as hype, deal fatigue, and emotions. Transactional values are just made-up numbers; they’re based on a value that you can measure. That’s why Ryan emphasizes the importance of cash flow; it allows you to track and measure the value of your company which can then be taken into account when someone is buying your company.

Why Does Long-term Value Matter?
Entrepreneurs start businesses but also forget to give themselves options. They begin to enjoy the process or get driven by their passion for their business, but they forget what comes after their business. You don’t run a business forever; you need to hand over your business at some point down the line. Almost 75% of business owners aren’t happy after they’ve sold their business. When you run a business and don’t think about an end, you don’t focus on growing your company’s long-term value, and when it comes to selling your business, you’re often left regretting the sale of your business. It’s crucial to sit down and decide what you want in life and, in turn, what you want out of your business. When you know what you want, you can lay down that plan and work towards an end. Your end can be anything from not wanting to handle a business to a shift of interests, but the important part is to give yourself options to either sell or hand over your business while getting the most value out of that deal.

Three things should be focused on — creating wealth, enjoying work, and making an impact. When you have all three, you’re left feeling satisfied as an entrepreneur. That’s why it’s essential to figure out if the end goal of your business aligns with the lifestyle you want to have. You can then develop your company’s value so that you have options that you won’t regret when you sell your business.