A CFO’s impact on Increased Company Value: Part 1 – Extrinsic Value Drivers

Company value is an important measure regardless of the owner’s plans on when and how to exit the business. It impacts estate planning, wealth preservation and diversification, and can help facilitate attainment of an owner’s ultimate goals. Remember, there is a 100% chance you will exit your business, so shouldn’t that be planned rather than left to chance?

Measuring company value shows the company’s progress over time. It should be part of the owner’s business plan and measurement metrics for how the business is progressing. Goals should be set and value measured.

To understand how a CFO can help increase company value, it is important to understand both the extrinsic and intrinsic value drivers of a business. This blog will cover extrinsic value drivers.

Extrinsic Values:

Cash Flow and Profitability are the primary extrinsic value drivers of a business. Net book value and intellectual property may also impact the ultimate value as well.

The primary valuation measure (an estimate cash flow) is EBITDA, i.e. Earnings Before Interest, Taxes, Depreciation & Amortization.

So profit improvement directly contributes to increased company value by increasing EBITDA. How does a Part Time B2B CFO® go about that increase? Consider these items:

1)      Pricing and margins – Are your products properly priced and are you able to maintain an acceptable margin. When is the last time you checked the details by individual product? Have you adjusted your pricing for changes in costs?

2)      Have you analyzed your payroll expense? Not just headcount, but with low rates of inflation and high unemployment, there is little wage pressure and many businesses are no longer doing annual increases, but rather selective performance based pay increases and incentives that don’t increase base pay. Pay for performance is the mantra of the day.

3)      Benefits: Make sure your benefits are affordable. Some benefits can be reduced by joining a PEO. In other cases, costs can be reduced by leaving a PEO.  This can be a critical analysis and yield significant cost savings;

4)      Sales Expenses: Verify the company is getting a return on its investment in a sales force. Analyze commission rates, commission earnings Vs commission draws, and reimbursed expenses.

5)      Marketing expenses: When is the last time you measured the effectiveness of your marketing strategy? This may not be the time to cut the budget, but properly deploying the funds can help impact sales;

6)      Overhead analysis: A line by line analysis of what makes up these costs will help identify potential cost reductions. Insurance, rents, telecommunications costs and even “sacred programs” need to be on the table for consideration;

7)      And finally, understand how your lifestyle impacts the profits and cash flow of your business. Do you have multiple cars, family vacations and compensation rates that should be adjusted against EBITDA for a better picture of the company’s true value?

A part time CFO can focus on these and other items and significantly increase profitability and cash flow, thus increase company value. And who will do it if the CFO doesn’t……..usually the Owner/CEO. And guess what, this will DECREASE company value. Read “The Danger Zone, Lost in the Growth Transition” by Jerry Mills, CEO and Founder of B2B CFO® to find out why!

My next blog will deal with intrinsic value drivers and how a B2B CFO® can help increase company value in this area.

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