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White Paper - Improving Your Company's Value

Dave Kramer, Outsource CFO Services  | Published on 6/29/2018

Ask Dave Kramer how to determine the value of your business
How well is your privately-held company running?  Here is a 10-point guide that will help you increase your value by getting to fiscal fitness.  How does value result from being fiscally fit?  Read on. 

 

  1. Be sure your monthly financial accounting is done in accordance with Generally Accepted Accounting Principles (GAAP) and can generate financial statements by the middle of each month.

     

    Financial accounting, as distinct from year-end tax accounting, has a national set of guidelines abbreviated as GAAP, which are accepted and expected by any institution that needs to examine your books, such as banks, potential landlords, or investors.   Users of financial statements thus know what assumptions lie beneath the numbers when they see sales, expenses, accounts receivable, inventory, etc.  So, it’s important to be sure your company’s financials comply.   

    Timeliness each month is important, too, because it sets a tone of financial discipline and ensures that the results for each month are known and can be acted on as quickly as possible. 

     

  2. Forecast cash ahead, to be sure there’ll be enough to fund your plans.Cash is the fuel that runs the business.Ideally, you have two forecasts.There’s a detailed one, repeated each week, that shows the next two or three months by week.In addition, you have a general monthly projection for the rest of the year that you tune up every month or so.

     

  3. Stay in touch with more than one bank, and keep your business forecasts up to date.Let’s say your cash forecast tells you that the cash generated by the business each month is not going to be sufficient.If you currently have bank funding and you need more than your bank can lend, you should test the waters by looking at other banks.Or, if you don’t have bank funding, you’ll need to start looking for banks.Often, if the company needs cash, the timing is short.The process of evaluating alternative banks is speeded up by having already talked with more than one.They learn about your business, and you learn about their lending capabilities.When you get into serious talks with alternatives, you’ll make a good impression by having a business forecast for them.They like to know where their money will be spent in the future.

     

  4. Always be looking for how you can increase your bottom line and your cash.Would it be by revising your pricing, reducing your cost of goods, decreasing your general operating expenses, collecting your receivables faster, turning your inventory faster?Look for the next soft spot on your income statement and balance sheet.

     

  5. Know where you make the most money on your product or service lines.That is, which one has the gross margin that’s the greatest percent of sales? Is there a way to increase sales there?That’s your gold mine.Examine the ones that make the least money and ask yourself the pricing and cost questions in 4., above.

     

  6. Develop a financial plan for each new fiscal year that reflects your overall goals for the business.This is a standard to measure against that will take you in the direction that you have decided is “right”.Plan the work, and then work to the plan.Of course, your very first plan will always be difficult, because making estimates is not easy.Assume you’ll be off by at least 15%.That’s better than having no direction.And, if you want to be acquired one day, you’ll raise your value by showing that you had the discipline of plans.

     

  7. Hold a monthly operations review with your head financial person and one or more key operating people.This meeting will discuss the previous month’s business results against your plan and will give you and your team direction for the next 30 days.What gets measured gets managed.Thus, your business performance and growth will likely improve.Focus the meeting on a dashboard of about 15 key indicators of the elements that drive your business.They should be both financial and operational.

     

    • The financial ones are typical income statement and balance sheet items, measured monthly and year to date against your financial plan (above).
    • The operational indicators are more specific to your business and should not exceed five or six.Examples:your success in bidding new contracts, or how long it takes to fill your orders and send invoices, or what percent of your staff’s time was billable (service companies).

     

  8. Create financial controls that deter and detect fraud.Over half of all small businesses experience fraud at some point, and most of it occurs in the finance department.The best control is two pairs of eyes.Examine your financial flows for the places that are the highest risk.That’s typically where cash is being handled or vendors being paid or processes are manual, rather than automated.Separate the duties there, or require two signatures.

     

  9. When you develop your annual financial plan, add the next two years to it, at least in general terms.This keeps defining the direction of your business—especially important if you’d like to exit.For example, if you need $X in sales to be acquired, you can use your multi-year plan to see how long that will take.The thinking process itself is as important as the numbers, sometimes more so.You’re forced to think in strategic terms, which is often difficult in the daily press of business.

     

  10. Be sure your financial records are kept in an organized manner, with backup detail.It’s likely that at some point, you’ll need to undergo an audit, either for borrowing or for acquisition.Good record-keeping will expedite the audit process.In turn, a smoother audit will increase the lender’s or acquirer’s appreciation for your company.

 

Most companies are founded to grow, earn money, generate cash, and provide an exit for their owners.  You can see how these 10 steps will help.  They’re all about planning, analyzing, and measuring your business to raise its value.    
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Dave Kramer is Outsource CFO Services.  He has helped build value during more than 25 years of CFO experience in a range of industries, at every dollar level from startup to over $100 million in sales.   Dave is a Board member at Chairmen’s RoundTable.  He can be reached at dave@outsourceCFOservices.com.