Inciteful

Meeting with a client recently we were discussing the “best” measure of business performance. Is it profit?  Market share?  Sales growth?  Staff morale?  Working capital efficiency?     

 

At Incite we believe that the “value” of your business is an excellent all round measure of the performance of your business.  In simple terms its the price an objective third party would pay for your business.  Generally SME business valuations are based on the profit the business generates multiplied by a factor which reflects the perceived risk of the business being able to keep generating that profit and continuing to grow.  The profit aspect is relatively easy to measure, most businesses look at that every month and decide whether they had a good month and are having a good year so far.  The multiple you apply to that profit figure is a bit harder to define, but obviously has a significant impact on the overall value of the business.  For example, consider the following two businesses:

 

	Business A	Business B
Net Profit	$850,000	$780,000
Risk Multiple	4.0	4.8
Business Value	$3,400,000	$3,744,000

 

In this case Business B has a superior value because its multiple is higher despite generating less profit. 

 

We believe that business owners and managers should be taking stock and trying to improve that valuation multiple just as much as profitability.  To do this we have developed a matrix of factors that contribute to the risk of the business.  We weight and assess these factors and every month we assess with our clients what has been achieved to protect and improve the multiple.  In this way we are always working on the overall value of the business, not just its profitability.   

Have you increased the value of your business in 2010? As business owners we frequently get caught up in the "doing" of business. Of course profitability and cash flow are always front of mind for all business owners -but it is important to regularly step back and look at our business and say hey -we might have improved my short term profit or improved cash flow but what has our team done to build long term value over the last 3, 6, 9 or 12 mths?

Incite recently performed this exercise internally and we found ourselves, like most business owners saying "wow we've been busy -but have we really added value to the business in the last 12 mths ?" When we were honest and said -"well possibly not" -then we resolved to do something about it. One tangible result of our internal review is the fact you are reading this blog - a new feature for Incite (keep an eye out for regular 'Inciteful' updates).

Another new feature is our new Workshop Series starting January with our "Creating Value In Your Business" workshop designed to stimulate your own thinking about your goals for your business and assisting you to identify what are the true value drivers in your business -so that you and your team can be sure you do more of them and less of what doesn't.... We'll shortly follow that up with Sales, Marketing, Finance, Export and Succession Planning workshops.

So watch this space and sign up to the RSS feed.

If you're interested in our January Value Creation workshop just click on our homepage here www.incitemg.com.au and follow the prompts for more information.                  

Alternatively post a comment and lets start a dialogue!   

Thanks