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Building Enterprise Value —

Revenue is vanity and profit is sanity,
but cash flow is reality
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The saying goes: Revenue is vanity and profit is sanity, but cash flow is reality.
Cash is the liquidity that makes our economy run. From the largest enterprise to the smallest proprietorship, cash is needed for commerce and is an essential yardstick of any business’s health.

We’ll explain in 3 method:

  • Explain what drives company valuations,
  • Share ideas on how to boost valuations, and
  • Suggest ways to build a cash flow forecast.

Drivers of Company Valuations

Valuation is complex and is derived from a combination of objective and subjective variables. A company will have a higher valuation with:

  • Higher profits. Investors want a profitable company. For every dollar of revenue, they want as much bottom line as possible.
  • Higher cash flow. Investors want a lot of the profits to be available after key investments are made. Some companies require a lot of cash to keep them running. Investors like businesses that demonstrate strong cash flow even after these kinds of necessary investments.
  • Robust cash flow. Investors don’t like risk and uncertainty. They don’t want cash flows that fluctuate wildly or are subject to the whims of one large customer or supplier. Having a diversified foundation of cash flows, built on a sound strategy that limits short- and long-term risks, means the business is robust.
  • History of performance. Strong track records breed confidence, so investors will place more value on a company that has grown its top and bottom lines reliably. Investors also assign value to strong operating metrics in areas such as product quality, delivery accuracy, and customer thrill. Measurements like these demonstrate operational excellence and support superior valuations.
  • Plan for future growth. Past profitability is great, but investors want even more profits and cash tomorrow. This requires a credible strategy that’s based on a clear understanding of the market, a sound business model, and specific initiatives that are expected to boost value.
  • Fewer assets. A business will be valued more if it requires fewer assets to yield current or future profits. Annual capital expenditure is a cash flow tied to the overall asset intensity of a business. The more efficiently a business runs, the fewer assets are required and the less cash is needed. This allows for a higher return on investment.

All of the above are quantitative considerations that guide company valuations. But ultimately, it is people who get things done. All else being equal, a company with a stronger team will garner a stronger valuation.

Improving Cash Flow and Valuations

Cash flows, and its valuations, are the result of many decisions. Some are longer-term (strategic) and others are shorter-term (tactical).

        Strategic Decisions

  • Decide what business you are really in. This is essential as it frames the competitive landscape and the skills you need to succeed.
  • Assess your current situation. You must diagnose your strengths and weaknesses as well as where the market opportunity lies.
  • Set your vision and targets. This represents what you’re trying to accomplish with your scarce resources.
  • Prioritize actions. This step represents the “how” to achieve your vision. You should encompass ways to leverage your strengths and bolster your weaknesses in order to grow effectively.

        Tactical Decisions

Many actions can improve cash flow. The wide array of levers includes:

  • More volume from new products, expanded distribution, increased trial, greater usage.
  • Higher price realization from list-price and trade-spend management, new products.
  • Lower cost-of-sales from smarter procurement, design and specification changes, production efficiencies.
  • Reduced expenses from removing unnecessary costs, improved efficiencies, tighter controls.

Sportlight on - Afarpack Wooden Packaging Payment Studio

AfarPack Wooden Packaging is a leading supplier of wood packaging boxes, Wood jewelry boxes, Wooden furniture, Wooden Outdoor furniture…

AfarPack Packaging is dedicated to help its’ clients with high-end quality wooden boxes in affordable prices & save it’s customer’s cash flow. AfarPack Wooden Packaging Boxes/ Furnitures order could be placed by:

  1. Sample mould charge can be rebated to your company if your order quantity is over one thousand.
  2. T/T, L/C, Paypal, West Union are accept by AfarPack.
  3. Factory Audit charges could be paied by AfarPack
  4. More Payment terms please contact AfarPack Sales Rep for details

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Businesspeople want to create a healthy enterprise; they want to grow. Building a valuable company is the result of many decisions – some big and some small. But cash is a thread that weaves through the whole discussion. Cash is the oxygen that makes companies run. With regular reflection by looking internally and benchmarking externally, fluency in the language of cash gives leaders and individual contributors alike the tools to find the best ways to tighten the supply chain and create more corporate and personal wealth.