Profit And Value

Making a profit is what any commercial organisation seeks and needs to do, right?  It’s kind of obvious, so why do we need to talk about it?  But I believe company value is just as important, but it receives much less attention.  Let me share some of my thoughts with you based on principles and insights rather than getting all technical.

The business owners most critical responsibility is to ensure their company makes a profit.  If a company is only breaking even, then the owner just has a job!  A profit grows the wealth of the business and adds value to the community connected to that business.  And this is a good thing for all parties connected to that business including staff, suppliers and customers. 

Our focus on profit

As business owners and managers, we need to focus on gross profit, operating profit and net profit for different reasons.  Gross profit encourages us to focus on the direct costs of production including the labour involved in producing and delivering the products and services.  Operating profit ensures we are keeping the cost of overheads and indirect costs under control, which can erode our profit if not managed well.  And finally, net profit (after taxes and interest) ensures we are making a real and genuine profit.

Now the limitation of profit is that it is a measure of what’s happened in the past.  However, because company value is a measure of projected revenues and earnings, this becomes a measure of the future and an indicator of a company’s success going forward.  So, by focusing on the future we are more likely to make better strategic decisions in the present. It also encourages us to focus on the long-term sustainability of our company.

While currently there is no agreed standardised method to measure projected revenue and earnings, it is still useful to consider the elements that could be included in a calculation, which I discuss below. 

A quick and good summary of the current methods available for valuing companies may be found at https://online.hbs.edu/blog/post/how-to-value-a-company

Company value

The value of customers is important as they will drive future sales revenue. Customer value can be estimated by the number of customers, the prevailing level of their satisfaction and loyalty, and the value of current contracts with individual or commercial customers. 

Employees are the most valuable asset companies possess and the one we expect the most from, but often the one that receives the least attention when it comes to being counted as being valuable.  Aspects to consider would be the number of long-term employees, their knowledge about how the company operates including its customers, experience and skills and their loyalty to the company.  

Partnerships with stakeholders such as suppliers and subcontractors, marketing firms and other parties that refer potential customers to your company, and subcontract work to your company.  These parties also add to a company’s value and should be included in any valuation.  

These days information and communications technology (ICT) is critical to a company’s success.  Aspects to consider is the extent to which customers enquire and make purchases through the company’s ICT systems, the use of ICT to make and deliver products and services to your customers, as well as maintaining good customer relations.  The value of ICT would also be based on its modernity, functionality, performance, reliability and security.

Other elements to consider include the productivity and performance of any production equipment and transport vehicles, company reputation within the community and with government bodies, and potential access to national and international export markets.

The combined effect of all these elements discussed will help determine how valuable a company is going forward.  Performing such as analysis will guide you to focus on areas that would be worthy of your attention and improvement, especially if these areas are currently lacking.

For help with improving your company’s profits and value, contact me on my Mobile 0402 843314 or john@johntedesco.com.au