Running a private business is more like driving through the bush than cruising down the highway. If you want to find out what’s really going on in your business, and where you’re headed, you’ve got to ask some tough questions – a lot of them. To keep it simple, let’s look at three critical elements that drive profitability and success in any organization – Finance, People and Technology. All three drivers have both external and internal factors that affect the value of your business. External factors are out of your control, while you can influence internal factors.
Finance. Yes, we’ve heard it before…it’s all in the numbers. Since financial statements are based on historical data, they alone will not tell you if your company is thriving or on the verge of failure. In order to spot business and environment trends and opportunities, as well as areas that need attention, you should regularly review internal financial information that provides insights into your company’s performance. Focusing on the right key performance indicators (KPIs) will provide more meaningful information and enable you to streamline your efforts. For example, if you’re concerned about meeting your bank loan covenant’s debt coverage ratio, include this ratio in your monthly reporting package and discuss it with your management team. When developing internal management reports and KPI’s, it’s a good idea to look at current and five year trends and to benchmark your company’s performance against industry data. Your CFO can work with your CPA to determine the key value drivers for your business and help you understand where to focus in order to meet your goals.
People. In an unofficial online poll, our firm identified that 81% of business leaders identified that their “people” or their workforce is the number one element that leads to increasing their businesses value. If that is the case, what are you doing to retain and attract the right talent for your organization? Your people can be a key differentiator for your business if you invest in them. The most successful companies realize that they are in the recruiting business – not just for new talent, but for the talent they already have on staff. Companies that successfully retain talent seek to understand their employees’ motivations and skill sets, and provide challenges and opportunities for employees to advance their careers. One such example is Starbucks, a company well known for its strong employer brand. Its CEO, Howard Schultz, stated in his book Pour Your Heart into It, “If you treat your employees as interchangeable cogs in a wheel, they will view you with the same affection.” Starbucks provides benefits and services well beyond the industry standard, and its employees respond with hard work and longevity. If you are seeking to understand the needs of your workforce at a deeper level, one way to accomplish this is to conduct an employee satisfaction survey. Before you take this step, be sure to discuss it with your management team. Once the survey is launched, serious commitment is needed to keep the information confidential and to address any concerns that may be identified.
Technology. Managing information technology costs, staying current with technological advances, and maintaining technical excellence are sources of value creation. Maintaining an effective technology plan is essential for leaders who want to increase productivity. We suggest you start with the basics – reliable and effective tools. Getting beyond the basics, every industry has enormous potential to add value through the implementation of superior technologies such as software applications, online programs to capture customer insights, and forecasting models to help track and measure your identified KPIs. Many companies hesitate to take advantage of these operational technology “upgrades” due to immediate cost concerns. Therefore, when deciding whether or not to invest in a new piece of hardware or software, always question its return on investment (ROI) and confirm the long-term outcomes that will be provided to your organization. Your CFO and your CPA will be able to establish the best way to minimize the cost through a variety of analysis. One way to accomplish this is by taking advantage of tax savings currently available through expensing, accelerating depreciation deductions and leveraging tax credit opportunities.
Hopefully, these few suggestions have helped stimulate your thoughts on where to go and how you can increase the value of your business.
Article Provided By Kathy Davis, CPA, CGMA MKS&H Managing Partner.
McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick. MKS&H helps owners and organizational leaders become more successful by advising them regarding their financial, technology and human capital management needs.