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Understand the value drivers in your business

B3In this article we briefly elaborate on an article that was placed in our previous newsletter, relating to business valuation.

In valuation terms, the value of a profitable business will be determined by its ability to generate future cash flows. Since the future is influenced daily by the decisions we make, it is important to understand the value drivers in your business, in order to be empowered to tailor your daily business decisions to the future success of your business.

Here are two tips on how to manage profit and growth, two primary value drivers in many businesses:

1. Protect your margins

Margins such as the gross profit margin and the operational profit margin can provide a great deal of insight into your business. Performance in these two margins can be a critical success factor for many businesses. It can also act as a barometer to highlight areas that may be candidates for improvement. It is therefore always a good idea to measure, monitor and manage these margins. Doing so should allow you to identify problem areas quickly and enable you to take swift action where and when it is necessary.

2. Plan for growth

For many businesses, growth is one of the primary objectives. The reason for this is obvious and as a business owner you will know the dangers of stagnating in a competitive environment. Although growth can therefore be a good thing, it can also put severe pressure on cash flow and cause a reputational and operational risk where growth is not aligned to capacity and delivery. When entering a growth phase, it is important to remember to align your capital budgets, cash flow projections and operating capacity capabilities to your growth strategy, before embarking on it.

Should you be interested in further discussion relating to the value drivers that are specific to your business, you are invited to make an appointment with the responsible director or with Malan Botha (malan@asl.co.za).

This article is a general information sheet and should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.