Last week we discussed how with the low probability your business will sell, only about 20% of businesses that go to market sell according to the Exit Planning Institute, that the owner is faced with a few options that can be of value. So, if you can’t or don’t want to sell your business, what do you do? Some business owners would be tempted to shutter their business or operate under the belief that a family member will take the business over. There are other options as well but for the business owner, everything starts with the current state of their business. As I wrote last week “The new focus for CEO’s was … on “organic growth was driven by market expansion, increasing revenues, operational improvement, and innovation. “ How does a small to mid-size business change their focus and develop the business in those areas?
Almost all business owners have resources they can use to develop and improve their business. Most have an Accountant, a Personal Wealth Manager, and a Banker. The value of each of these is as different as their occupations. Accountants are incredibly valuable for knowing where your money in the business goes and providing you with the maximum in tax savings. Personal Wealth Managers are great for improving your personal finances with an eye toward long term financial stability and growth, Your Banker is good at holding you accountable for business performance especially if you are a business loan customer. While each of these is great resources none of them actually address your business from process improvement and/or production focus. Even if you are a service business and your product is service you have production and process issues. Generally, the best resource for these issues is a strong well-qualified Business Coach or a Business Consultant/Advisor who can address your business holistically and not just separate parts.
As a recap for last week, we stated that:
Most businesses focus strictly on what drives the revenue component of EBITDA. You have to focus on what occurs after revenue and as a result, this will help you have some influence on the multiplier used to determine your business value. To do this, you should:
Manage what drives your Cost of Goods Sold (COGS) such as:
- Labor (Direct)
- Inventory
- Shipping and Handling
Manage your non-COGS business expenses
- Assets
- Expenses such as insurance
- Non COGS labor (Indirect)
The Owner must also transition themselves out of a revenue-producing role as much as possible. The reason for this was answered earlier when the Owner exits the business so does their value. That value must and should be replaced before the Owner leaves.
This all starts with a clear understanding of your business processes. How you do things. While you don’t have to map out every single process a good place to start is with a process that is key to your business. That could be driving trucks to deliver goods, the machining of aircraft parts, or the building/assembly of electronic components, or any other activity that is key to your business.
Process mapping involves a few easy to use symbols and a conversation with those involved in the process you have selected to map. These symbols tell you the action; they are connected by lines that show the process flow and help you visualize exactly what happens in your business. The simple symbols you want to use are:
These symbols are then used as a road map. Here is an example of a simple process map.
Once you have the map you can review your process and ensure it makes sense. Many times, processes don’t look as orderly as our example. Instead, they may resemble a pile of cooked spaghetti. When this happens you have to analyze your processes in order to improve them.
If this seems too complex don’t worry as there are professionals who can help you with this. If you are fortunate to have them on your team already you are ahead of the game. All you need do is start mapping and improving your processes. Understanding your processes addresses important areas such as COGS, Gross Margin (Profit) and Expenses. This, in turn, will help you improve efficiency, reduce time, waste and error while improving business performance and profitability.