The difference between business profit and value

The difference between business profit and valueA successful business is one that is making a profit, paying the bills, and letting you live the life you desire, right?

Wrong. A healthy profit does not equal a valuable business. While you might have a healthy cashbook, it does not mean your business has value to a prospective buyer.

Profit measures what has happened in the past (its revenue minus its expenses), the value is a measure of the businesses current and future profits.

However, value measures more than just money - it's also about your intellectual property, your plant and machinery, employee contribution, marketing and more importantly, the future of your business and its client loyalty and trust.

To better understand this concept, think about how you would prepare yourself to invest in a company. You could either look at its current profit level, or you could look at the price, its future potential, the value of its stock, the talent in the team and whether this value will increase over time. Making a judgement based only on profits would be short-sighted.

Once you understand that its value driving your business’s longterm success, you can plan to increase its value and the good news - profit should naturally follow.

Tips to increase your business value:

Establish recurring and diversified revenue streams

Sales drive every business, so always look at ways to consistently increase them. Secure recurring contracts for the medium to long-term, and find ways to diversify to bring in additional clients. Also look at how you can add extra value to keep everyone on your database motivated to continue to buy from you. More sales equates to more cashflow and a healthier bottomline.

Keep key employees

your experienced staff are a valuable asset. Build long-term incentives, stability and career progression opportunities. If selling, motivate them to stay on after the business is in new ownership.

Ensure the business is not dependent on any one person

If the future success of your business is dependent upon a few star employees or one person on the leadership team, it can decrease its value. Processes, systems and self-sufficiency within the team are essential. Ensure the goodwill is attached to the business and not to you.

Differentiate your business

a business that has unique capabilities and stands out from its competitors has increased value. Providing an unparalleled service or unique and valued product creates long-term, profitable customer relationships. If you don’t have a differentiating factor or competitive advantage, create one.

Have a strategic plan for tomorrow

Create a long term strategic plan that maps out your vision for the company, your market, its growth potential, any threats and how you intend to implement that plan. Addresses all areas like the impact and use of technology, sales growth, brand preservation and growth, and marketing strategies to find new markets and clients.

Strengthen systems and structures

Standardise procedures and systems, put training and operation manuals in place, keep your financial records current, than make sure your employees are following every step of every procedure. From customer inquiries to stock control, to implementing your monthly marketing, organise your operations so anyone can step easily into the driver's seat.

Selling your business is a major decision. Understand what drives the value in your business before you sell.

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