Regardless of the stage of your business or details of your future strategy, Growth, Profitability, Predictability and Independence are the magic words.
These are the four drivers which should be at the forefront of your mind if you want to run, buy or sell a successful company.
Growth
Ambitious private business owners and CEOs as much as investors like a dynamic and growing company. Start with asking some of the below questions which might give you pointers or creative ideas to improve your company’s growth and identify potential hurdles. Because only when you are aware of an obstacle, can you work on finding ways to resolve it.
- Is your business growing faster than inflation?
- Does your business have a unique selling proposition, brands or IP with a lot of potential?
- Could you sell more of your current products/services or adjust pricing when dealing with your existing customer base?
- Are there enough new customers in your existing market who you could approach to support future growth?
- Is your sales team incentivised, aligned with company’s objectives and motivated?
- Is your overall market growing?
- Could you expand/diversify your product/services portfolio to tap into new markets or enter new geographies?
- Can you identify any major hurdle slowing down the growth potential of your business now or in the future?
Profitability
Growth itself does not save the day. Ensuring that the company’s top line performance is reflected in its profitability helps to streamline your key business decisions.
- Does your company generate sustainable gross and net margins higher than industry average?
- Is each of your products/services/customers or market segments profitable?
- Is your business exposed to significant fluctuations in input prices and can these be minimised or passed on to customers easily?
- Is your senior-management profit driven and responsible for achieving profitability targets?
- Can you quantify the proportion of costs that are part of operating activity and what is exceptional?
- Are all transactions in your business market-rate-transactions, e.g. when dealing with related parties?
- Can you quantify the proportion of your profit that translates into freely available cash?
- Are you aware of any items outside of your control restricting your company’s profitability?
Predictability
What makes a valuable company? Your business is growing and is very profitable, but what actually gives you peace of mind and prevents sleepless nights is predictability. Because everyone likes to feel in control and know what comes next.
- Are you on top of your monthly P&L, balance sheet and cash flow?
- Can you quantify how much cash/capital you need employed to keep your business running?
- Do you set your targets in formal budgets and business plans?
- Does your company’s performance usually track well against the set targets?
- Do you have visibility about where your company is heading and how far it has gone on this journey?
- Does your business have repeat customers or visible recurring revenue?
- Are your customer and supplier relationships secured by contracts?
- Is there any main factor blurring your view of the future?
Independence
Especially for a private business owner it is difficult to “let go”. However, a good business is an independent business, in the wider sense.
- Could you go on extended holiday and not worry about something going wrong in your business whilst you are away?
- Can you rely on your senior-level employees to run the operations of your business?
- Is knowledge documented and shared within the company?
- Is your business process-driven?
- Is a large proportion of revenue at risk due to reliance on one product, service, customer or market?
- Do you have back-up suppliers for your main input factors?
- Is your business operating from a site which is secured by ownership or fair lease contracts?
- Could the business be put under pressure from its creditors or other stakeholders?
In conclusion
Whilst running a business can be complex and CEOs very often get dragged into the minutiae of the day-to-day, it is important not to derail too much and always keep the bigger picture in mind. Introducing standardised weekly or monthly reporting with the focus on tracking key performance indicators can be a very useful tool to evaluate your business on an ongoing basis and compare its performance to your targets. Building a history of robust financial and operational ratios will provide you with valuable insight into the effectiveness of any changes or strategic decisions undertaken over time and take a lot of weight from your shoulders in a potential due diligence exercise should you be seeking an investment.