Value Driver #1: Business Structure

Value Drivers are elements of a business that reduce risk and improve returns. In order to build the value of a business you must understand what  business valuation experts believe justify a premium price. There are two types of business drivers:  generic (common to all industries) and industry specific.  We have planned a series of articles to introduce you to the most important generic business drivers:

• Business Structure
  
• Strategic Financial Planning
• Internal Operating Systems and Procedures
• Human Resources
• Financial Management
• Benchmarking and measuring success

This month we will talk about business structure, and how it can affect a business’ value. Business structure is the foundation upon which everything else is built, and without sound structures in place, risk goes up while value goes down. There are three main components of business structure:

1. Corporate Documents
2. Organizational Structure
3. Competition

Corporate Documents

Your corporate documents must be maintained and in order at all times. Documents can serve as signed agreements that describe how the business will operate. If  the company has multiple shareholders, the rights and responsibilities of each shareholder should be clearly documented in order to avoid misunderstandings.

You can minimize risk by maintaining documents that are applicable to your business such as:

• shareholder agreements
• buy/sell agreements,
• by-laws  
• operating agreements

These documents should clearly state  how the company will address various situations as they occur.  For example, what will the company do if one of the shareholders becomes ill or passes away? Having a plan -- in the form of corporate documents -- lowers risk and raises the value of a business.    

Organization Structure

Creating an organization flow chart -- also known as process charting, workflow charting or business process mapping -- defines what a business entity does, who is responsible for specific tasks, to what standard the business process is to be completed, and how the process can be measured to determine success or failure. If only the owner knows who should be doing what, the value of business decreases because it is unlikely that the business could continue without the owner.

The functions represented in the chart can consist of sales and marketing, human resources, shipping and receiving, manufacturing, inventory, accounting and finance, and purchasing. Each business function should flow seamlessly to the next business function throughout the organization and should be completely understood by management and employees alike to maximize the efficiency of operations and to minimize the risk of loss.

Competition

You should know your industry and know who your competitors are, both directly and indirectly. Once you have that understanding (through research) you need to formulate documented plans to deal with competitors. The execution of a well thought out plan will reduce risk of loss due to competition.

Why Do You Need Key Performance Indicators?

Key performance indicators are one of the hallmarks of good business management. Performance indicators provide an analysis of the overall business operations of a company, which can be used to make decisions about finance, employee training, resource deployment, and many other facets of the business. Although universal indicators do exist, business owners will benefit more from having information about their individual companies.

Goals related to sales, production, resources, and more are clearer and more measurable when companies use key performance indicators. Over time, performance indicators create a historical record of business operations, so that it is easy to make comparisons year-to-year or quarter-to-quarter.

Performance indicators can serve as an external benchmark that allows for the comparison between a company and the industry standard. It can be difficult to measure the performance of a small business to that of a larger operation, but performance indicators let business owners look at smaller, more comparable data sets.

Using performance indicators to set company policies can help make sure that all employees follow the same operating standards. Policies related to customer service can benefit from the use of customer service performance indicators, and operational managers may find performance indicators useful in reviewing employee performance.

Key performance indicators usually track money spent on business operations and the return from business opportunities. Implementing performance indicators that specifically track cost cutting measures or increasing sales can enhance profitability by allowing for small operational changes that have a big impact based on what the performance indicators show.

Tips for Developing Individualized Key Performance Indicators

Set your goals. 

Without clear goals, performance indicators cannot measure progress because no one knows what they are progressing toward. Specific, clear goals for each area of the company from safety to sales to employee performance.

Attach numbers to each goal. 

Giving concrete value to each goal provides specificity and gives the company clear, measurable objectives.  How many new customers  are necessary? How many safety violations must be avoided? How much money needs to be saved through cost cutting measures? “Increase profitability” is a vague goal; add $1 million in new sales is clear and measurable.

Track progress that has already occurred.

 When key performance indicators are paired with specific company activities, it becomes easier to develop indicators that will measure progress toward future goals.

Take a close look at the current numbers.

Analyze the numbers in each area of review and determine the percentage of change that has occurred. Examining current numbers will help in developing effective goals for the future.

Decide how often the indicators will be reviewed.

Key performance indicators should be reviewed at set dates throughout the year; different areas will require different frequencies. For example, financial indicators may be reviewed monthly, but employee review indicators may only be reviewed annually.

How To Effectively Plan for the New Year

Establishing business goals early in the year is critical for businesses because goals set the course for the upcoming months. Planning is far more effective when informed by the past. Using some simple guidelines as you map out your company’s year will help you stay on track when unexpected events and nagging details threaten your progress toward your goals.

Think Long Term Considering where you want your company to be in one, three, and five years as you plan for the upcoming year will give you a global setting for your goals. Just as it makes sense to break large tasks into smaller ones, it is also effective to break your long term goals down into short term goals.

Think Short Term Your short term goals, whether monthly, quarterly, or annually, should act as reference points along the way toward realizing your long term goals. Having short term goals will provide your company with a clear path to longer term goals.

Make Your Clients or Customers Part of the Process Your customers are the most important source of information about your financial future. You probably don’t want to invite them to your planning meetings, but you should certainly consider the information they provide. In addition to using your sales numbers in the planning process, you may want to use surveys and questionnaires to learn more about what your customers prefer.

Ask Your Employees Management does not always have the same kind of contact with customers as other employees do. Including employees from every level of your organization in the planning process may reveal facets of the day-to-day operation of your company that you hadn’t considered. Additionally, when employees have a clear idea of the organization’s overall goals, they more clearly understand how their positions contribute to reaching those goals.
Track Your Progress Assessing progress at regular intervals helps in realizing goals. Regular assessment shows clearly whether a company is progressing toward its goals or has gotten off track. Regular assessment also provides motivation for your team as well as allows you to recalibrate as necessary.