Wednesday, January 18, 2017

Driving Value with Financial Performance

Do you want to increase the value of your business?  Are you focused specifically on increasing the value of your business or are you simply hoping that its value will increase as a by-product of focusing on increasing sales or providing 5 star customer service?

A recent client was focused on just that - increasing sales and providing 5 star customer service. Sales did increase but at the expense of margin reductions.  Our client was accepting lower prices to attract new customers and increase sales volumes to existing customers.  Over a three year period, there were no significant changes to the bottom line.  As a result, the company's value did not increase. 

Value is ultimately driven by a company's future income or cash flow expectations.  Increasing your operating cash flows and minimizing the risk associated with achieving and/or exceeding the anticipated cash flows will increase the price an acquirer is willing to pay for your business. 

I recently introduced you to the Value Builder SystemTM, a statistically proven coaching program to help you increase the value of your business that starts with obtaining your Value Builder Score. 
The first value driver addressed in determining your company's Value Builder Score is Financial Performance.  Your company's financial performance includes its history of producing revenue and operating cash flows combined with the professionalism of your record keeping. 
Increasing your company's annual operating cash flows can be achieved by increasing revenues and/or decreasing costs. 
To increase revenues you can increase your prices or increase volumes. Some strategies to consider to increase sales volumes include:

1. Selling more existing products to existing customers (market penetration);
2. Selling new products to existing customers (product development);
3. Selling existing products to new markets (market development); and
4. Selling new products to new markets (diversification).

To decrease costs you can look at ways to reduce direct material and direct labour costs which will help increase your gross margins.  You could also focus on reducing other operating expenses and overheads to improve your net profit margins.  Various outside consultants can assist in this area. Companies like Salvis Group can help improve operating systems/processes to improve efficiency and reduce costs.  Companies like Expense Reduction Analysts can identify general and administrative cost savings to improve your bottom line.  There are also companies that specialize in providing research and development tax credit recoveries to increase your company's operating cash flows.

Improving the quality and integrity of your financial reporting (e.g. monthly, quarterly or year-end financial statements) can also help increase your company's value.  This can be accomplished by improving your accounting information system or upgrading to a review engagement or audit.  Potential purchasers may be willing to pay more for a company with a quality financial reporting system that produces accurate and reliable financial statements and other financial reports.

Wouldn't you like to know where your company ranks under the Financial Performance value driver?   That's where the Value Builder Score comes in where business owners complete a 13-minute questionnaire to receive their Value Builder Score out of 100.

Empirical evidence shows that companies with a Value Builder Score of 80 or more receive offers that are 71% higher than the average business!  Simply put, improving your company's Financial Performance will increase the value of your business.

Over the coming months I will continue to expand upon how the other key value drivers can increase the value of your business.  I will provide examples for each and discuss what you can do to improve your company's ranking in each of the 8 key value drivers.

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