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Category: Business Planning

5 numbers you need to run your business

How can you outsmart your competition and grow your company? Let’s say you are the owner of a small company. It is profitable, because bills are paid and money is in the bank. However, the company is not growing or becoming more profitable. Many companies devise corporate strategies to achieve these goals and some include very specific interim goals. But a great number of strategies are poorly executed and goals are not achieved. One factor that distinguishes great companies from many ‘also-rans’ is that they are very analytical; they have detailed, actionable information, and a deep knowledge of their entire value chain whereas many companies are data-rich, but information-poor. Key Performance Indicators (KPIs) measure factors that are crucial to the success of your company. KPIs are a way of measuring how the company is achieving its interim goals and therefore executing its strategy. These KPIs should be informative and specific to the decision maker that uses them and be ‘drillable’, i.e. a decision-maker should be able to drill down and see the various components that make up a single number. General Motors has the following six main KPIs: Market share, revenue, operating profit, cash flow, quality and customer support. Each one of these can be subdivided. Market share, for example, can comprise submarket models and analysis. A Balanced Scorecard is one common way to look at KPIs. This assesses the achievement of goals from a number of different perspectives; those of the Customer, Internal Business Processes, Financial Performance and Innovation and Learning.

In the GM example, four of the top six KPIs are related to financial performance, one is related to the customer and one is related to internal business processes. This is fairly typical of an owner or top executive perspective. Others, such as a VP of sales, would require different KPIs related to customer satisfaction, retention, acquisition and support. Now let look at the five KPIs a business owner needs to follow and which are crucial to the success of his business. These indicators need to be strategic. I have chosen five indicators which are all related to financial performance as they are important from a top-level point of view:

1. Sales growth. What are your sales and how much are they growing. For example, if you want to double your sales in five years, they need to increase by 15% by year.

2. Gross Profit. What is gross profit and the gross profit margin as a percentage of sales?

3. Net Profit. What is the net profit and what is net profit as a percentage of sales?

4. Return on investment. What is the net profit divided by the amount of capital you have invested in the business? Ultimately, running your business has to be more profitable than putting your invested money in the bank or buying publicly traded dividend paying stocks.

5. Cash Conversion Cycle. What is the time it takes to spend cash (on inventory, materials etc.) from the time it is collected through customer sales? Even if very profitable, a business must keep a keen eye on its cash to ensure that there is not a sudden cash crunch.

To improve your business, you need to review these 5 numbers on a regular basis.

Posted in Business Planning, Planning

3 Ways to Make Your Company More Valuable Than Your Industry Peers

Have you ever wondered what determines the value of your business?

 

Perhaps you’ve heard an industry rule of thumb and assumed that your company will be worth about the same as a similar size company in your industry. We have found there are eight aspects that drive the value of your business, and they are all usually more important than the industry you’re in.

 

Not convinced? Let’s look at Jill Nelson, who recently sold a majority of her $11 million telephone answering service, Ruby Receptionists, for $38 million.

 

That’s a lot of money for answering the phone on behalf of independent lawyers, contractors and plumbers across America.

 

To give you a sense of how high that valuation is, let’s look at some comparison data. The Value Builder system has studied over 30,000 businesses in the last five years. The average value for companies looked at was 3.6 times pre-tax profit.

 

When they isolated the administrative support industry that Ruby Receptionists operates in, the average multiple offered for these companies over the last five years was just 1.8 times pre-tax profit.

 

Jill Nelson, by contrast, sold her interest in Ruby Receptionists for more than 3 times revenue.

 

There were three factors that made Nelson’s business much more valuable than her industry peers, and they are the same things you can focus on to drive up the value of your company:

 

  1. Cultivate Your Point of Differentiation

 

Buyers of companies do not buy what they could easily build themselves. If your main competitive advantage is price, an acquirer will rightly conclude they can simply set up shop as a competitor and win most of your price sensitive customers away by offering a temporary discount.

 

Ruby Receptionists invested significantly in technologies that ensured that no matter when a client received a phone call, that call would be routed to an available receptionist. Nelson’s competitors were mostly low-tech mom and pop businesses who often missed calls when there was a sudden surge of callers. The technology at Ruby Receptionists could handle spikes in phone calls because of the unique routing technology Nelson had built that transferred calls efficiently across her network of receptionists.

 

Nelson’s acquirer, a private equity company called Updata Partners, saw the potential of applying Nelson’s call-routing technology to other businesses they owned and were considering investing in.

 

  1. Recurring Revenue

 

Acquirers want to know how your business will perform after they buy it. Nothing gives them more confidence that your business will continue to thrive post sale than recurring revenue from subscriptions or service contracts.

 

In Nelson’s case, Ruby Receptionists billed its customers through recurring contracts—which made buyers confident that the company was there to stay.

 

  1. Customer Diversification

 

In addition to having customers pay on recurring contracts, the most valuable businesses have lots of little customers rather than one or two biggies. Most acquirers do not want any customer to represent more than 15% of revenue.

 

At the time of the acquisition, Ruby Receptionists had 6,000 customers paying an average of just a few hundred dollars per month. Nelson could lose a client or two each month without skipping a beat, which is ideal for reassuring a hesitant buyer that your company’s revenue stream is bulletproof.

 

Nelson built a valuable company in a relatively unexciting, low-tech industry, proving that how you run your business is more important than the industry you’re in.

Posted in Business Planning, Value Builder

6 Reasons Not To Diversify Your Business

How does the blender manufacturer Vitamix get away with charging $700 for a blender when reputable companies such as KitchenAid make blenders for less than half of that?

 

It is because Vitamix specializes in one thing, and they do it better than anyone else.

 

WhatsApp was just a messaging platform before Facebook acquired them for $19 billion US. Go Pro produces the best helmet mounted video cameras in the world. These companies stand out because they poured all of their limited resources into one big bet.

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Posted in Business Planning, Value Builder

How Much Goodwill Do You Have in Your Company?

The term “goodwill” is often used in conversation as a subjective description of how much your customers like your business.

However, in valuing a business, there is nothing subjective about the definition of goodwill. It is the difference between what someone is willing to pay for your company minus the value of your hard assets.

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Posted in Business Planning, Value Builder

5 Reasons Now Might Be The Right Time To Sell

Are you trying to time the sale of your business so that you exit when both your business and the economy are peaking?

 

While your goal to build the value of your company is admirable, here are five reasons why you may want to sell sooner than you might have planned:

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Posted in Business Planning, Planning, Value Builder

Is the Year You Really Increase the Value of Your Company?

If you have resolved to make your company more valuable in 2017, you may want to think hard about how your customers pay.

If you have a transactional business model where customers pay only once for their purchase, expect your company’s value to be a single-digit multiple of your pre-tax profit.

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Posted in Business Planning, Value Builder

3 Surprising Reasons To Offer A Subscription

You can now buy a subscription for most consumer products from dog food to flowers. Music subscription services are booming as our appetite to buy tracks is replaced by our willingness to rent access to them. Starbucks now even offers coffee on subscription.

Why are so many companies switching to a subscription business model? The main reason is that recurring revenue increases the value of your business, but there are some other, less obvious, benefits to add a subscription offering to your business.

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Posted in Business Planning, Planning, Value Builder

Growth vs. Value: Not all revenue is created equal

When you put together next year’s financial plan, will your growth come from selling more to your existing customers or finding new customers for your existing products and services?

The answer may have a profound impact on the value of your business.

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Posted in Business Planning, Value Builder

Six ways to profit from your vacation this summer

Summer is here, and although it may seem strange, now may be the perfect time to increase the value of your company.

 

The most valuable companies are the ones that can run independently of their owner. A buyer will pay a premium for a company that runs on autopilot and levy a steep discount for a business that is dependent on its owner.

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Posted in Business Planning, Value Builder