Many small business owners will go for years without using common sense analytical techniques to manage the value of their company. Value doesn’t just happen. It is the result of strategic moves made resulting from sound, tried and true techniques. Below are three simple actions you can take that may result in increased value for your business.
- Benchmark: This is a tool used to compare your business to other similarly sized and situated businesses. Start with a reliable set of financial statements for your business. It would be helpful if you have several years of statements. Obtain statistics from several sources on businesses in your same industry; (e.g.) Almanac of Business and Industrial Financial Ratios (prenhall.com), Risk Management Association (RMA) Annual Statements Studies, BizMiner (www.bizminer.com), IRS Corporate Financial Ratios (www.valuationresources.com), and IRS Corporate Ratios and IRS-CALC (www.rmahq.org). These stats should include key financial ratios and operating percentages such as Working Capital ratio, Debt to Equity, Debt Coverage ratio, Gross profit and net profit percentages. Also, look at the larger expenses of operations such as wages and salaries, occupancy costs, and material costs. Compare these ratios, percentages, etc. to your business and determine how you stack up. Are your labor costs too high? What about your gross profit percentage? A hard look at this comparative analysis may well reveal a glaring problem in your business plan. Your labor costs may be higher than your competitors. Find out why. Develop a plan to bring the operating ratios and percentages in line with your industry.
- Business Intelligence: Knowledge is power. Business knowledge (Intelligence) can give your business extra earning ability. With the internet today, it is easier than ever before to gather business intelligence. Who are your competitors? How much market share do you have? Is your industry growing? Who are your key customers? The sources of this intelligence are vast. We subscribe to expensive data bases and research services that provide this data. However, most of this information is available online. You may be in an industry on the downhill side of its growth curve and not know it. Good sources of business intelligence can include suppliers, regulators, and your trade association. The goal is to chart a course within your competitive market environment that gives your business its best chance for success.
- Strategic Planning: It sounds complicated and too advanced for the typical small business owner. However, strategic planning is simply planning for the future. In our business we focus on a two year and five year plan. The plans call for estimating staffing needs, capital expenditures, physical plant needs and locations, etc. These are issues that generally shouldn’t be dealt with “on the fly”. Your planning process will usually highlight areas of our overall business plan that need adjustment.
When we are involved in helping clients who are selling their businesses, we find that buyers are willing to pay higher multiples for businesses that are run using these three simple tools. Our firm has the tools and expertise to assist you in the implementation of these techniques for adding value to your business. Call us and we can mentor you through the processes or give you well researched, stand-alone recommendations.