Economy in Crisis? – 4 Keys to Small and Mid-sized Business Survival
September 2008 has brought to a boil serious economic issues that have been simmering for the past 18 months. So, what does this mean for small businesses as they attempt to navigate a potential financial minefield? Now, more than ever, is a time to focus on fundamentals: profitable, value-creating growth.
Many businesses owners might react to current conditions and retrench. Some might believe the most prudent course of action is to cut spending, freeze hiring, scale back expansion plans. However short-term, knee-jerk reactions such as these may produce a temporary improvement in “business fitness” yet do little to position the business for long term success. Clearly, this is not the type of “focus on fundamentals” that is meaningful for mid-market business owners.
Times such as these require a more thoughtful approach – a focus on fundamentals is a focus on profitable, value-creating growth. A 4-step approach embracing a “value management” mindset is paramount to surviving and prospering in these turbulent financial times.
Step 1: What’s Your Business Current Market Value?
A necessary, yet often overlooked aspect of effective management is understanding market value of the business. A first step is to conduct a formal business valuation. A formal business valuation provides an owner with a snapshot of how effectively they have been in creating economic value for themselves and other stakeholders in their businesses.This snapshot provides a starting point to measure business value over time. If value is not measured it can’t be managed.
Step 2: What is Your Plan for Growth?
Next, business owners need to develop a growth plan. Far too few business owners have a systematic plan for growth. Fewer explicitly link their growth strategy and value management. Resources to fuel business growth require investment capital – equity and debt – and a basic understanding of the returns (above the cost of capital) that will be generated on the capital consumed in growing the business. Growth plans formulated with a keen understanding of how well they contribute to business value is fundamental.
3. What are the “Levers” that Contribute to Value Creation?
Cash flow is the life-blood of value creation. The value of a business is the future expected cash flow discounted at a rate that reflects the riskiness of the cash flow. Focus is needed on the discretionary decisions that drive long-term, sustainable cash flows from both the income statement and balance sheet. Business owners need to identify their unique value drivers and determine how changes in each of these drivers impacting their business performance. In general, these key drivers or levers are both strategic and operational including:
- pricing decisions
- product introductions/innovations
- market and customer segments
- investments in capital,equipment, people and processes
4. What’s Your Exit Plan?
Ultimately, all business owners exit their businesses regardless if it’s planned or unplanned. An exit plan sets the objectives, timeline, and milestones that establish the goal line for a business owner. A core component of this exit plan is the desired business valuation upon departure. The exit plan and valuation goal brings the business owner full circle, connecting future and present.Without an exit plan the owner has no overriding framework to help control their business destiny.
Given the current economy, a focus on these four fundamentals should provide the owner a roadmap for long-term success and exiting the business on your own terms.
