We move this week into looking at the 5th of the 5 V’s and that is the valuation or how to measure the worth of the business. This element in the 5 V’s does have some correlation to the profitability of the business but as importantly the other factors which cause a business to be not just financially successful but exist at a higher contribution value.
Organizations JKL Associates engages with, establish a series of metrics or evaluation points by which progress is gauged. These are set up so we can assess whether the strategies and tactics being implemented are contributing in the way they were structured to contribute or not. Without some means to measure and evaluate, then it is just guesswork on whether the best progress is being made.
Let’s consider some points of measurement for valuation. Some financial components must be part of this system. The discipline of reviewing the P&L for trends and variations once monthly reconciliations are complete should be woven into your metrics. A Balance Sheet review on some recurring cycle is also part of those financial statements that deserve review. If you are not comfortable with looking at these then engage your accountant/CPA to build a deeper understanding. If you have internal financial talent, make sure they are doing a full review and debriefing with leadership on status.
Other valuation points to consider are sales pipeline development and conversion value of pipeline to revenues. This area is where the sales team forecasts and delivers on its contribution to the growth and success of the business. You might at this point be saying this is all very standard stuff. I would agree 100% but many organizations just don’t do it or brush very lightly and quickly over it. They don’t see the trees of the forest on the trends or indicators that can come for these valuation points.
Some other valuation elements might include the nature or type of customer/client base you presently have and what it needs to be as you grow forward. When businesses startup, all revenue is good revenue because without it the business fails. As time goes on if the same mindset remains then it can continue to bring in customers and revenue types that place an added burden on the company and restrict longer-term growth. If this is not a metric that is understood by the sales team, then they continue to acquire revenues in the wrong part of the marketplace. It is not just about sales. It must be about the right type of sales and the correct profitability and quality of those dollars that need to be evaluated.
Other things for consideration might be where is the business in relation to its future perpetuation/exit. As a leader looks at converting the business asset into a different financial asset then other valuation elements need to be put in place. During the early phases of a business’s life, the finance model might favor one set of tax strategies where later in the life of the asset it becomes extremely important to build EBITDA, and that needs some different positioning of the financials.
This week take some time to assess what metrics or valuation points you have established to allow you to monitor progress. Think of looking at your business through the lens of a vehicle dashboard. Don’t just rely on idiot lights to flash on if something is going wrong. Have gauges that you can regularly review for both positive and negative trends. It is better to know the status of your fuel (i.e. sales/cash flow) than to guess based on looking at bank balances.
Interested in starting your 2024 with a new dashboard and possibly looking at a Profit First approach to business success? Let’s talk by calling a Promise Guide at JKL Associates – FL (407)984-7246 or MI (313) 527-7945. JKL Associates works both in person and virtually with clients, so kindly don’t make your location a limiting factor.
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