Elements to Increase Your Company Value – Financially

TAX VS. PROFIT/VALUE OBJECTIVES

There can often be a conflict between tax objectives and profit objectives. No one likes to pay taxes so the IRS has allowed certain tax-saving principles to be used to lower taxes. Many of these principles reduce net income. Lower net incomes produce lower business values. Therefore, it is important to determine when or if a business is going to be sold to maximize the profit objectives over tax objectives.

One example to illustrate the point: A group of owners, own a building. The building is leased to the same owners of a different operating company. The building tax structure will allow $40,000 per month rent to provide zero taxes for the building owners. The operating company is charged $40,000 rent. The market rent would be, say, $20,000 per month. The tax benefits are that the building owners have zero tax and the operating company can write off an extra $20,000 per month rent which lowers its taxes. Both parties win on taxes. However, for a valuation, an adjustment to market rent could be made to increase net cash and raise the overall operating business value.

REOCCURRING REVENUE

Reoccurring revenue can increase the confidence level of projections and thus raise the value of a business because projections with a large reoccurring revenue base are more stable and increase the probability and surety that the revenue will occur.

Have you recently checked out the cost of an ALL-IN-ONE Hewlett Packard printer? (About $200) This printer has many functions: black and white or color copies, shrink or magnify, fax, photo printing, computer interfaces, scan and more. It is a great deal. Of course, you may still need to visit sites like https://www.printivity.com/products/magazines/ for bigger printing projects like booklets and magazines but for the most part, it’s a decent printer.

• How much was a laser black and white printer about 15 years ago? (About $10,000). Today’s printers are a great deal.
• However, how much is an ink cartridge? (About $30-$50) The reoccurring revenue is large.
• Another example: how much did you pay for your last cell phone upgrade? ($0 to a few dollars) Why? Because the phone company ties you into a two-year contract and the contracts are like an annuity and provide high-value multiplies.

Like an annuity and provide high-value multiplies

One CEO, explained that she did not have any reoccurring revenue because her customers had to renew every year. Her business was in the gym/spa business. Normally the turnover in this industry is 30%-50% per year. Many people join in January as part of a New Year’s Goal, only to quit after a few months.

In her business, 95% of her customers renewed each year. Wow, this is a high-value business that would command a large value multiplier.

Therefore, work to obtain renewing contracts, consumable products and create a proactive customer service program (Explained later) to raise the retention and renewal levels which will increase the value of the business significantly.

Topics on Financial tools to increase value to follow include:

Growth History and Market Potential: Rifle vs. Shot Gun Approach

• Net Profit: History and Potential: Management Accounting vs. Financial Accounting
• $1 Expense Reduction = $1 Net Profit Gain
• $1 Sales Gain @ 25% Cont. Margin = $0.25 N Profit Gain
• Contribution Margin: Break – even

Financial Qualitative Performance

• A/R Days – A/P Days
• Cash Flow
• Valuation Metrics
• Performance Dashboard

https://successbiznow.com/financial-valuation-services/

Financial reporting and the use of performance metrics dashboards, do you know why you need them?

Dashboards, do you know why you need them?

If you graph cash flow and its elements, such as, A/P, A/R, Inventory, capital expense, bank accounts, etc. for the last two years, it becomes much easier to project 12 months into the future and see trends that may have happened in the cash flow area.

A graphical representation of cash flow is one of the most important tools for an executive and should be included on any performance metrics dashboard.

A spreadsheet should also be used to translate the accounting cash flow statement into a rolling 12-month history and a 12-month future cash flow measurement tool.

A graphical cash flow rolling historical can make future projections easier to complete. These tools can be critically important for growth, seasonal trends or shrinking companies.

Many companies have died in their growth because they did not track cash flow or the needed cash flow resources.

Some elements that could be included in a graphical dashboard are shown below. Graphs are much easier to review and assess the company performance than a series of data tables. The author suggests the following graphical metrics:

• A/R
• A/P
• Inventory
• Capital
• Overall Cash Flow
• Contribution Margin (CM)
• Break-even Dollars and Units
• Productivity Index:
• Revenue per full-time employee. ($Rev/FTE)
• Contribution margin per FTE (CM$/FTE)
• Net income per FTE: (NI$/FTE)
• Revenue
• Net Income
• Average Sales Price/Unit

Performance Dashboards are keys for performance improvements presented by Dale Richards and testified to by Scott Minerd, Akron, Ohio. Vistage members learned key business concepts from Dale Richards’ presentation on Business Valuation Principles – How to Increase Your Business Value, Financially, Operational and Strategically.

 

 

Keys to Performance Metrics | Graphical Dashboard

Keys to Performance Metrics | Graphical Dashboard, a 12-month rolling tracking system can work on most performance metrics.  It works by adding up the 12 months and graphically representing the sum on a monthly or another time basis. For example, if you add June of the present year; then the previous June is taken out of the sum.

Build Value for High Exit – Financially, Operational and Strategically

Let’s say I am a startup, what’s my cost of capital? 20-80%. Growth rate? 15-40%. Mature companies? 10-25%.

That can create a large error.

Before and after tax rates.

If you don’t use the right rate, that creates an error. This one, most people don’t know nor have heard about. Does anybody not want to be in business longer than 5 years?

No? Are you exiting? You want to get out.

Okay. Usually, you have to take 5 years of financials, but the business is going to keep going for another 20 years. What credit do you get for the 20 years out if you don’t do something to give up the credit. You’re just going to get the 5 years.

It’s called the terminal value. You simulate selling the business in Year 5. Then you get the value of all of those years coming up to Year 5. It’s a huge error if you don’t do it. Then there’s discounts and waitings.

It’s not as easy as throwing a dart at the wall and everybody comes up with the same number. There’s lots of variability. However, you have to justify the variability.

Why would you discount your company value if you were selling a minority share?You don’t really have any control of what they decide to do. Right? You’re just going along for the ride and hope they do a good job?

If you are selling a block of shares in a minority- Let’s say your value is $10 million. You can discount that 14-40% depending on the situation. What if you were selling to somebody who is on the board? He or she has some say, so you wouldn’t discount it 40%. You might discount it 20%. So there’s minority.

What about marketability. Why would you discount something for marketability? What is marketability? You can sell your stock whenever you want, right? If you’re a public company, there’s no discount for marketability because you can sell it anytime you want.

If you are a privately held company, how do you liquidate your shares?

One way is to the other party. Or you sell it at interest. This discount ranges from 10 to 52% depending on the situation. Let’s say you have five buyers who were courting you. Would your marketability of discount be 50%?

It would be lower because you have people who are out there courting with you. You have to look at the situation and again, decide what the discount will be. Then there is an early stage discount for early companies. Then once you get all these 7 numbers, you have to determine the viability of each one. You weight them.

Okay, maybe history is worth 25%. But history projected 20%. Or you like management’s projection. It’s pretty solid. They have reoccurring revenue. They have systems. I am going to weight that one 50%. Then that’s depending on the appraiser and discussing with management the reliability of the data.

You can get to one number by weighting, but the beauty of this is that you have 7.

You can see what my asset sheet is worth. I can see what comparables are worth. I can see what five different scenarios of my discounted cash flow are worth and how I look at those to move my company to higher value.

Knowledge, again is power

This is a good topic, one that I have with business all the time.

__________________________________________________________________

Build value for high exit, Trevor, Atlanta, learned from Dale Richards Valuation Presentation

Build value for high-exit, Trevor, Atlanta, learned from Dale Richards Valuation Presentation. Dr. Travor learned key business concepts from Dale Richards’ presentation on Business Valuation Principles – How to Increase Your Business Value, Financially, Operational and Strategically. Listen and learn.

The Cash Flow Report – Revisited

By: Dale S. Richards
10/26/2016

This blog is a continuation of the series on How to increase your business value with financial concepts:

• Financially – Part V

Today’s blog will present the addition financial metrics different from the traditional bank financial ratios and metrics.

Cash Flow

Monthly financial statements without a cash flow statement are not as effective.  The standard cash flow statement will show the increases and decreases in cash of key metrics but only on a monthly snapshot basis.  It is very difficult to determine where cash comes and goes in the company from the monthly cash flow statement.  It does not show trends or cycles.  In fact, the figure below represents how a typical executive feels about cash flow.

Cash Flow: If there is a negative cash flow, you feel sad and wonder where it went. If you have positive cash flow then you smile but a monthly view is not very effective.

If you graph cash flow and all of its elements, such as, A/P, A/R, Inventory, capital expense, bank accounts, etc. for the last two years, it becomes much easier to project 12 months into the future and see trends that may have happened in the cash flow area.

A graphical representation of cash flow is one of the most important tools for an executive and should be included on a situation dashboard.

A spreadsheet should also be used to translate the accounting cash flow statement into a rolling 12-month history and a 12-month future cash flow measurement tool.

Cash flow rolling historical and future projections can be a critically important tool for growth, seasonal or shrinking companies.

Many companies have died in their growth because they did not track cash flow or the needed cash flow resources.

Contribution Margin vs. Gross Margin
(Management Accounting vs. Financial Accounting)

Part III – Elements to Increase Your Company Value – Financially

This blog is a continuation of the series on How to increase your business value with financial concepts:

• Financially – Part III

Today’s blog will present the concept of Contribution Margin.
This may seem an obvious concept but is often misunderstood. If you reduce a businesses expenses by one dollar, how much net income will increase? (ONE DOLLAR)

Reduce $1 Expense = $1 Net Profit Gain

EXAMPLE: What will happen if your marketing department proposes to the executive team a program estimated to spend $1 million dollars and bring in $2 million revenue? How much net income will you bring in?

The answer depends upon a financial term that is often misunderstood – CONTRIBUTION MARGIN.

Almost all businesses track REVENUE, COST OF GOODS or SERVICES with the resultant – GROSS MARGIN. However, there is a principle called VARIABLE COSTS. A variable cost is one that is a function of revenue. Meaning, when revenue is created; then an expense is triggered. Many hidden variable expenses are accounted for as administration or overhead costs when they are actually tied to revenue and should be categorized as “Variable Expenses”. When all of the variable costs are subtracted from GROSS MARGIN, then a magic number happens called the Contribution Margin (CM).

Most accounting software programs do not calculate the CM. Why is the CM so important? Because when you know the CM percentage then you can calculate the Break-Even for the overall company or any revenue-generating project.

Revenue
– Cost of Goods Sold/Services Rendered
=Gross Margin
– Variable Expenses
=Contribution Margin
________________________________________
BREAK-EVEN = Fixed Expenses / CM %

Let us examine some potentially hidden variable costs that may be in fixed costs or the administration/overhead area.

A. A Salesperson’s Commission (salary is a fixed expense). Therefore, a sales representative income should be booked in two different accounts: Salary (Fixed: Marketing) Commission as a variable marketing expense and should be in the VARIABLE COST section which is subtracted after GROSS MARGIN.
B. Freight/Postage: Some postage is for samples, mailers, regular mail and should be booked as a Fixed Expense – Overhead, but shipping expenses for products should be booked as a product cost of goods sold (Variable Expense).
C. Customer Product Installation
D. Customer Training related to the product sale
E. Warehouse/Production expenses that would not occur if sales did not happen.
Go through your profit and loss statement and examine every expense to see if it is a variable expense component – then account for it properly. Some expenses are part variable and part fixed. These should be booked in the two different accounts.

Go through your profit and loss statement and examine every expense to see if it is a variable expense component – then account for it properly. Some expenses are part variable and part fixed. These should be booked in the two different accounts.

Why go to the trouble of finding all the variable expenses and determine your contribution margin? An example is in order:

BACK TO EARLIER EXAMPLE: What will happen if your marketing department came to you with a proposal that cost $1 million and they said it would produce $2 million in revenue? Your Gross Margin (GM) is 60%. You might approve the project because in GM theory, the project would make $1.2 million. ($2M x 60% GM = $1.2 GM profit). HOWEVER, what would happen if the real Contribution Margin (CM) were 50%? The proposal would just barely break-even ($2M x 50% CM = $1 million CM). Then the project would be just break-even and be too risky to approve.

Many CEOs have asked why a revenue-generating project with a supposed high GM, that should be making money, is actually losing money. It is because the CM is not calculated and considered in the project proposal and is lower than the GM.

Once you know the CM, it is a magic number to determine the break-even for the company, division, project, department or other category.

To change a company’s accounting system and booking procedures to a CM basis takes 3-6 months.

Your controller may not like this concept very much because this process takes time to change your accounting system. More bookkeeper work is needed to make the expense entries. When the credit card bill comes in, if it is part variable and part fixed then more data entries are required. When the salary check goes out, if it is part variable and part fixed, more entries are required.

Topics on Financial value increase tools to follow include:
• Financial Qualitative Performance
       o A/R Days – A/P Days
       o Cash Flow
       o Valuation Metrics
       o Performance Dashboard 

Increase Your Company Value Financially.

The next several blogs will focus on HOW TO INCREASE YOUR BUSINESS VALUE:  FINANCIALLY, OPERATIONALLY AND STRATEGICALLY.  Today’s blog will present the first two of eight FINANCIAL aspects and ways that can raise your business value.

A. TAX VS. PROFIT/VALUE OBJECTIVES

There can often be a conflict between tax objectives and profit objectives.  No one likes to pay taxes so the IRS has allowed certain tax-saving principles to be used to lower taxes.  Many of these principles reduce net income.  Lower net incomes produce lower business values.  Therefore, it is important to determine when or if a business is going to be sold to maximize the profit objectives over tax objectives.

One example ot illustrate the point:  A group of owners, own a building.  The building is leased to the same owners of a different operating company.  The building tax structure will allow $40,000 per month rent to provide zero taxes for the building owners.  The operating company is charged $40,000 rent.  The market rent would be, say, $20,000 per month.  The tax benefits are that the building owners have zero tax and the operating company can write off an extra $20,000 per month rent which lowers its taxes.  Both parties win on taxes.  However, for a valuation, an adjustment to market rent could be made to increase net cash and raise the overall operating business value.

B. REOCCURRING REVENUE:

Reoccurring revenue can increase the confidence level of projections and thus raise the value of a business because projections with a large reoccurring revenue base are more stable and increase the probability and surety that the revenue will occur.

Have you recently checked out the cost of an ALL-IN-ONE Hewlett Packard printer?  (About $200)  This printer has many functions:  black and white or color copies, shrink or magnify, fax, photo printing, computer interfaces, scan and more.  It is a great deal.

How much was a laser black and white printer, about 15 years ago? (About $10,000).  Today’s printers are a great deal.

However, how much is an ink cartridge? (About $30-$50)  The reoccurring revenue is large.

Another example: how much did you pay for your last cell phone upgrade? ($0 to a few dollars)  Why?  Because the phone company ties you into a two-year contract and the contracts are like an annuity and provide high-value multiplies.

One CEO, explained that she did not have any reoccurring revenue because her customers had to renew every year.  Her business was in the gym/spa business.  Normally the turnover in this industry is 30%-50% per year.  Many people join in January as part of a New Year’s Goal, only to quit after a few months.

In her business, 95% of her customers renewed each year.  Wow, this is a high-value business that would command a large value multiplier.

Therefore, work to obtain renewing contracts, consumable products and create a proactive customer service program (Explained later) to raise the retention and renewal levels which will increase the value of the business significantly.

Topics on Financial tools to increase value to follow include:

• Growth History and Market Potential: Rifle vs. Shot Gun Approach
• Net Profit: History and Potential: Management Accounting vs. Financial Accounting
  • $1 Expense Reduction = $1 Net Profit Gain
  • $1 Sales Gain @ 25% Cont. Margin = $0.25 N Profit Gain
  • Contribution Margin: Break – even

 

• Financial Qualitative Performance
  • A/R Days – A/P Days
  • Cash Flow
  • Valuation Metrics
  • Performance Dashboard

 

https://successbiznow.com/financial-valuation-services/