Do you know how much your business is worth?
When the excitement of launching a business is over, you’ll be in charge of new and more complicated organizational tasks. However, all the hard work you put into marketing and achieving milestones go to your enterprise value.
The strength of a business is often determined by its enterprise value. As your business grows, this will become a crucial factor in making key business decisions. Whether you want to seek funding or sell your business in the future, a high enterprise value will be more beneficial.
This guide covers everything you need to know about calculating and increasing your enterprise value. Read on to find out more!
What Is Enterprise Value?
What is enterprise value? It’s the measurement of the entire market value of the business and provides more comparable metrics.
The enterprise value gives you preferable terms with dilutive securities. This includes convertible preferred stock, warrants, and stock options.
As mentioned, you can use this value when seeking funds or changing ownership. Moreover, comparing your enterprise value with other companies determines where your business stands.
1. Learn About the Business
To increase enterprise value, start by learning more about the business. For your information, the entire valuation process is extensive and time-consuming. If you want a smooth workflow, review all crucial information about the company.
In this step, you must analyze the company. Look over your annual report, and review financial statements and computing ratios. All these can give an idea about the business’s standing.
The annual report is a comprehensive document that explains the company’s performance. It contains the highlights, goals, and objectives. The report summarizes vital activities of the past year.
Next, your financial statements determine how you operate. It gives an insight into your revenues, operating costs, and financial management. Using the information can help you make a wise economic decision.
Your financial ratios help you assess business performance. You can use the data to compare the business to other enterprises and work to improve. Often, the ratios measure the relationship between the components in the financial statements.
2. Perform an As-Is Process Analysis
If you need more understanding of your business, perform an as-is process analysis. It assesses your operations, determining and quantifying the current processes versus competitors.
The as-is process analysis provides a comparative view of how a business creates value. In addition, it identifies activities that can grow and destroy your enterprise value. Often, this reviews your operations, working capital management, and other business areas.
Note that these factors can affect your growth, profitability, and risk.
Measuring value drivers is vital in a business. Without it, you can never determine your KPIs and their importance in increasing enterprise value. Note that KPIs get outdated over time, affecting operations.
Apart from processes, you must assess the qualitative aspects of your business. It includes your accounting policies, corporate governance, and more. Moreover, it’s best to review external factors affecting business valuation.
Doing so gives you crucial information about the industry and your enterprise value.
3. Determine the Vital Components
To calculate a business’ worth, there are components you must identify and understand. The formula for enterprise value contains factors that affect it. It includes market capitalization, preferred stock, total debt, and cash and cash equivalents.
Market capitalization is the total value of the company’s outstanding shares at the current market price. To compute it, multiply the common shares by their current price per share.
Preferred stock can act as equity or debt, depending on the nature of the issue. It represents a claim on the business to factor into enterprise value. In this sense, the preferred stock is more of a debt and added to the total debt.
Your total debt is the contributions of creditors to your business. They are interest-bearing obligations, either short-term or long-term. Then, your cash and cash equivalents are the liquid assets in your statements.
4. Compute for the Enterprise Value
After determining the values of your components, start calculating enterprise value.
In the simpler enterprise value formula, you don’t need the number of preferred stocks. You only need to add market capitalization and total debt. From the sum, subtract your cash and cash equivalents.
The extended formula for enterprise value includes other components. You need the value of common stock and minority interest. To compute, add the common stock, preferred stock, total debt, and minority interest.
Like the simpler formula, subtract the cash and cash equivalents from the sum. You deduct the cash balance because it becomes yours upon getting complete ownership.
5. Undergo a Focused Benchmarking Analysis
Benchmarking is a tool used to improve your business. After computing, use the data to compare business performance with other companies. Doing so allows you to identify areas in your business that need improvement.
Benchmarking can determine if your processes are better or worse than your competitors. In addition, this can tell you what factors contribute to the price point of other companies. For instance, one of the value drivers of a company is its intellectual property.
The analysis can determine the operations and practices to continue, reassess, and abandon. If you make improvements, the tool can forecast the value you can earn from it.
6. Invest in Sales and Marketing
To improve your enterprise value, you will sometimes need to sacrifice plans or start new projects. Doing so allows you to sell in your timeframe and at your price point. Your growth depends on your practices, resources, and investments.
One way to increase your business worth is by investing in sales and marketing. Start by developing a plan. It must outline the strategies for raising brand awareness and customer loyalty.
In your advertisement, convey a clear message to your potential customers. Convince them your product or service is the solution they need. To keep customers, consider creating a loyalty program.
Discounts, incentives, or free samples can build trust and boost customer retention. For effective marketing strategies, some businesses offer their services. You can discover more about it here.
All About Increasing Your Enterprise Value
As a business owner, your enterprise value is a unit of your company’s success. Increasing its total worth allows you to execute plan changes in the company. You can use the data to prepare for an IPO, seek funds, or sell the business.
Use this information to fine-tune your operations, refine performance metrics, or develop strategic plans. Are you looking for more tips on improving business performance? Check out our other blog posts for more.