There are several ways of creating extra shareholder value. The beauty of it is that one way doesn’t exclude the other. On the contrary; a well thought out and creative strategy can take advantage of all the existing opportunities and possibilities in the company to create extra returns. In this blog, we give you our views on focusing on value based on three levels of value.
During the course of our day-to-day activities, we regularly talk to business owners who work in their company. By this we mean that they spend a disproportionate amount of time on operational matters. Their working days are governed by clients, staff, production processes, you name it. Of course, there is nothing wrong with this. The more efficient the organisation of the company is, the greater the chance of success. But as a business owner you would be wise to work on your company too. After all, it is your capital that is ‘in the business’. And you want to secure a return on this. How do you do that then? What’s the best thing to do? At Stratfield, we look at the focus on value at three levels.
Value level 1 – Pursuing results
Entrepreneurs generally measure their success against their turnover, margins and results. In many cases, the focus lies on turnover growth. If the turnover is in line with the prognosis, then the margins and the results or the profits come into the picture. An increased turnover therefore means better results. At the same time, entrepreneurs try to influence the results in a positive way by carrying out continual improvements and adjustments in their business operations. This might include process optimisation, cost price reduction or a higher level of customer satisfaction. Important focal points that require constant attention are the increase of delivery reliability and the recruitment and retention of staff. In other words, at this level you achieve turnover growth in combination with an ever increasing efficiency in business operations.
Value level 2 – Pursuing returns
At this next level of focusing on value, making a profit is still the underlying principle, but now we are adding a return on invested capital to it. How do you determine this? Quite simply, by dividing company results by the invested capital. This formula implies that the return is affected by the level of the results and by the amount of capital existing in the business. If the results are the same, but the capital required to run the company diminishes, then the return will increase. An attractive spin-off is that the value of the company also increases.
This level of focusing on value does, however, require a more conscious manner of looking at the company. By this we mean that the trick lies in ‘freeing up’ the liquidity already available in the company. For example, this might include:
- Raising the stock turnover ratio
- Adjusting the debtors’ and creditors’ days outstanding
- The reduction of the scope of work in progress
As you can see, it’s possible to ‘free up’ money without complicated financial models and/or borrowed capital. With less money in the business, the same or even better results can often be achieved. The effect of this is that the return on the invested capital always increases. And that ‘freed up’ money? You can use that for new activities. Or for investments in real estate or shares. Because that is also an excellent option.
Value level 3 – Pursuing value
At this third level of focusing on value, we add yet another aspect and this involves the return on the assets of the business. Imagine that a business has invested in specific knowledge or a unique production process. Or money has been released to set up a logistics network. This knowledge, that unique process or that logistic network may also be of great interest to other market participants. In other words, it’s possible to devise an interesting revenue model: for example, in the form of a takeover or a participation. This means that all those investments made will yield even more. Studies have shown that many companies and particularly those who go in search of alternative revenue models achieve an above-average return on their assets. Or, by giving other companies the means to grow, you can optimise the use of your own assets and the return will increase. How about that for value creation?
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