How To Create Value In Your Business

[Editor's note: This is the final installment of an eight-part series on business management by Mark Roberts, who details the lessons he learned as a result of placing his HVACR business into Chapter 7 bankruptcy liquidation. His goal: to prevent other business owners from going through the same ordeal. Here, Roberts discusses value and its impact on your company's success.]

How is value measured and created in your company? How do people around you define value? For your customers, value could mean that your company provides honest service on time at prices that are perceived as fair.

For your employees, value could mean feeling that they work for a company that treats them well and that they are rewarded in some way for their hard work.

For your vendors, value could mean that your company maintains a professional image that benefits their brand's identity, and that they receive payments on time.

All of these things directly affect the value that you, the owner, and your equity investors receive from your company. But what does value mean to you?

Maybe it means you have some freedoms that you didn't have when you worked for someone else. Maybe you feel a strong sense of accomplishment running your own business. However, if your company is not achieving financial value, the other forms of value that you perceive will be short-lived. Your company must achieve financial value.

Valuable Goals

Financial value can be achieved when you actively pursue the following goals:

Develop and successfully execute a strategic plan that helps you to manage sales, expenses, and assets in such a way that you achieve your financial goals.

Earn a return on investment (ROI) that meets or exceeds your company's costs of financing.

Earn a return on equity (ROE) that meets or exceeds the returns of other investment opportunities of similar risk.

Earn consistent profits by managing your company's operating and financial risks.

Achieve consistent sales growth by knowing your company's manageable sales growth potential.

Successfully manage your company's cash position for positive cash flow.

Invest in your company's long-term growth.

In the end, your business is a financial asset that can either be sold or purchased by you, the owner. Every day that the company is not sold by you, it is purchased by you. Think about that for a moment. Every day that you go to work, you make a conscious decision of whether to buy into your company or to sell it.

Table 1. Company A’s profit picture over a four-year period.

If you were looking at your company as an investor, would you buy your company? Compare the two companies shown in Tables 1 and 2. Which company would you rather purchase?

Table 2. Company B’s profit picture over a four-year period.

Most investors would choose company B because it has consistent sales growth, consistent profit growth, and consistent cash flow growth (dividend potential). Company A is all over the map. It would be considered a very risky (high-variance) investment.

If your accountant suggests tax strategies to reduce your company's tax liability, which in effect reduce your company's profits, you should discuss your long-term plans. Some tax strategies will not affect the sales value of your business; others might.

Tax planning should also be a part of your long-term strategic planning. Potential profits that end up being reduced if you take a larger salary/bonus should not affect your company's sale value.

Financial value is the creation of wealth. The creation of wealth makes it possible to achieve consistent customer, employee, and supplier value; this increases wealth even further. There should be no bad conscience on the part of the owner for achieving financial success. If the company does not consistently provide financial value, everyone loses.

Wrapping It Up

The topics that have been discussed over this eight-part series are those I believe would have helped me avoid several mistakes throughout the course of my experience in the HVAC business.

I read a book about the development of Home Depot that describes the difficult time the founders had trying to finance the startup company. Everyone they approached felt that an adequate ROI was not possible based on such a large asset (inventory) base. Sales numbers required to earn an adequate ROI at the prices Home Depot stores anticipated selling them for had not yet been achieved.

Business instincts eventually won out over business as usual. Huge financial value has been created for many people since the company's early beginnings. Financial strategies were still used, but in an "outside-of-the-box" way that had not been thought fiscally responsible before.

However helpful and informative you may have found these articles, remember they are only tools to assist you in decision-making. They should not take the place of your business instincts, but should support them.

Roberts is the owner of Roberts Commercial Lending Co. LLC. He can be reached at 586-716-8329 or CommercialFnnc@aol.com.

Publication date: 04/26/2004

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