It’s common that companies don’t focus on value creation until the business owner begins working to generate a meaningful liquidity event as a send-off to a comfortable retirement. But creating value at every stage of a company’s lifecycle in some capacity is possibly just as important.
“At the beginning and during a company’s growth cycle, value creation helps drive growth and increases a company’s competitiveness,” says Steven E. Staugaitis, director of Audit & Accounting at Kreischer Miller. “While the need to increase a company’s value becomes more pressing at the later stages, it takes time to create that value — it doesn’t just happen over the course of a year, it takes several years.”
Smart Business spoke with Staugaitis about creating value in a company, and when the effort to create value outweighs the value created.
Generally, what are the primary ways in which value is created in a private company?
Value is a product of the cash flows a business generates divided by its risk factors. Put another way, companies can influence the value of the business by improving cash flows through increasing revenue, reducing expenses and improving efficiencies; or by reducing risk, which is affected by a variety of factors, including the number and types of customers, recurring vs. project-based revenue, the state of the balance sheet, the depth and strength of the management team, and how dependent the business is on its owner for its continued success.
In what ways can the pursuit of value creation become more costly than the value created?
Value creation becomes costly when the business owner is not thoroughly evaluating the return on the investments the organization is making. Sometimes an initiative starts with momentum and enthusiasm, and then the business doesn’t follow through on it. Instead of making investments that generate a return and add value, the company is just burning through expenses.
How do businesses determine the most economical ways to create value in their companies?
To determine whether actual value is being created, it pays to go back to evaluating what ROI looks like. For example, businesses that are looking to grow their customer base can accomplish this in a number of ways. They can buy another company that already has an embedded customer list, knowing at the time of the purchase what it will pay vs. the revenue it will earn; or look to grow internally by growing the sales team and giving them goals that will present a clear path to the type of return that’s expected. Evaluating ROI is a critical step in determining the most economical way to create value.
How can an accountant help companies in this pursuit?
Accountants have a unique perspective because they work with so many different businesses, which gives them the chance to see how lots of companies handle risks and manage their investment initiatives. They can also participate in or lead strategy sessions with business owners and/or the management team — sometimes it’s good to have someone from the outside who has deep financial knowledge facilitate a discussion or identify flaws in the process.
There are many ways to influence the value of a company. Businesses that do well at this don’t try to tackle it all at once. They take time to identify the key factors, maybe a dozen or so, then they narrow it down and focus on the top two or three initiatives. Less successful companies tend to spread themselves thin chasing too many opportunities, or start and stop and never see anything to completion. As a result, they end up with a lot of activity that ultimately results in nothing gained. Sometimes, when chasing value-creating initiatives, the expression, ‘Done is better than perfect,’ is apt.
Owners should play a role in helping to recognize when they and their executive teams are getting distracted by day-to-day activities that sacrifice time that could be spent working on bigger-picture plans. These plans are vital to the ongoing success of the business and ultimately benefit the business much more in the long run.
Insights Accounting & Consulting is brought to you by Kreischer Miller