Your Small Business – Big Future

The cold harsh reality of being a private small business owner is that one day you will no longer be the owner of a business.  This builds on your earlier dreams and aspirations.  Your business is the most valuable asset you ever had; even more valuable than your home.  It represents years of hard work and sacrifice. 

At some point, you will make the difficult decision to sell your business.  Whether that is a family member or someone from outside the family, the value of your business at that time will have a significant impact on your financial and lifestyle comfort going forward.  What you do now will strongly impact that inevitable day. 

Whether you plan to sell your business next year or 20 years from now, planning ahead is a critical part of your business process.  Developing a plan that will improve revenue, profit, and business value and then sustain those improvements is necessary.  Not all plans are considered equal. 

There are many things you can do to grow the value of your business.  These usually fall into the following two groups: 

Organic Growth – this is the growth the business generates for itself through increased performance, productivity, and profitability. 

Growth by Acquisition – this is the growth the business generates through the purchase of other businesses. 

For our purposes, we will focus on organic growth.

In an earlier post, I discussed the structure of your business.  I used a modified Venn Diagram to create a business structure of four overlapping circles defining 8 key functions of the business, At the top are production and production management.  The right is marketing and sales, the left is waste management and team development.  The bottom is customer service and customer retention.”   The focus here was to use one-half to reduce costs and the other to increase revenue.  Each part contributing a separate value.  Structuring your business with this model is the first step. 

Your next step is to know, not think or feel, know the actual performance of your entire business as well as each of these 8 areas.  A comprehensive business diagnosis, that includes a valuation, is essential.  This isn’t an expensive proposition requiring accountants and financial planners.  Simple diagnostics and valuations are available for a nominal cost and they give you the same information the more pricier ones do. 

You then want to focus more on each independent circle and its specific contribution to the business.  Developing a strategy that, for example, ensures your marketing is delivering a well-defined dollar figure of new first-time business, your customer retention is keeping a well-defined number of existing customers.  Your Production or Service Delivery reduces error by an acceptable level and so on.  Establishing strong financial performance measures and working toward their accomplishment in each of the four circles (8 areas) is the key next step. 

As a part of the strategy, you will need to develop and then use a forward-looking budget that addresses your business holistically and is usable at each level of business performance, from extremely productive to breaking even.  While obviously, your focus should be in the middle of those two points, they are always something that you should have awareness of.  Part of this strategy is: 

  • How you manage your accounts receivable.  Remember, any payments due you beyond 30-days are essentially a loan to your customer.  The longer the loan the less value to your business. 
  • Your Debt to Income ratio.  A quick temperature check that tells you the strength of your business through the eyes of a potential lender. 
  • Your business security accounts.  This is your cash balance.  Savings, checking, both are necessary accounts for the security of your business.
  • Your cash flow.  For most small businesses I recommend enough cash coming in and going out each month to at least pay your monthly bills AND make the necessary deposits to your security accounts. 
  • The current rate of growth or erosion of your business as reflected through the value of your customers.  In other words, while we know how valuable your customers are, we need to be able to assign a specific value in order to plan for and project growth; or stop erosion. 
  • The current and period to date performance of each of the 8 areas of your business.  It is important to remember that you cannot sell more to make more and sustain or improve the long-term value of your business.  The ENTIRE BUSINESS must be healthy and performing well. 

Yes, these steps take time and effort.  They take a little bit of work.  With the right systems in place, it could take you anywhere from 2-3 hours a month to accomplish everything I mentioned above.  A very small amount of time for one of the largest investments of your life both now and for after you leave your business.