Corporate Financial Planning: The Value of a Business Process Change
The Value of a Business Process Change: When thinking about strategies that significantly increase enterprise value, our minds tend to immediately think of strategies that grow revenues like adding a new product, investing more in sales resources or acquiring another business. One strategy that often gets overlooked is implementing a business process change. However, since most companies are valued based on a multiple of cash flow not revenues, finding ways to improve existing business processes can lead to significant growth in enterprise value. Here’s are some added reasons why a business process change can be a powerful driver to increasing enterprise value.
#1 – Business process changes are recurring
In business we talk about repetitive behaviors as ‘processes’ whereas when talking about individuals we call them ‘habits’. Whether its processes or habits, there is high growth potential in improving both because they are recurring. Everybody loves recurring revenue but changing recurring behaviors produces repeatable, increases in profits year after year.
#2 – New business processes often don’t cost much
Doing things better often times doesn’t require a significant upfront investment in equipment or software, only more forethought and intention. Improvements in margins may not ‘feel’ like a significant change but a 1% or 2% improvement can have a huge impact on enterprise value. As an example, a 2% gross profit margin improvement on a 10% profit margin business effectively increases the enterprise value of business by 20%. Stated another way, you’d have to grow revenues 20% to create the same increase in enterprise value that you’d get by improving margins by 2%.
#3 – A business process change creates an opportunity for greater employee involvement and engagement
Business owners often say their favorite thing to do is work ‘on’ the business not ‘in’ the business. Many employees could say the same thing. That is, thinking of ways to improve the business and discussing that with peers and their bosses can be energizing and increase their engagement. Further, and maybe more important, employees are on the front lines serving customers which means they likely are your bestsource of ideas for process improvement.
#4 – Potential for exponential increase in value as business grows
But perhaps most exciting of all, business process changes and improvements can drive exponential increases in enterprise value as the business grows. Meaning as revenues increase, the value created by implementation of a new processes can have a multiplying effect on the Company’s enterprise value. To give you an example, I had a client that increased its revenues by average of 35% per year over four years. This means their annual revenues were 1.5X greater four years later. In addition, they improved their product mix and pricing strategies which led to a decrease in cost of sales by 4%. The combined impact of their growth and process improvements created an 8X increase in enterprise value over those four years!
So as you think of ways to grow your Company’s value, consider looking at business process improvements. As mentioned above, they may not be as obvious as revenue growth strategies but they can offer recurring benefits, offer opportunities for greater employee engagement and lead to exponential increases in enterprise value!
Richard MilamCEO EnableSoft Inc, Orlando FL. “As an early second stage company, we needed growth capital and planning advice and counsel. A fellow business operator and trusted advisor recommended Lantern. Chris learned our unique business, helped us structure a growth strategy and wrote and marketed our plan. We obtained the funding in a short order with the benefit several varied proposals. I am delighted to include Chris a very small group trusted confidants and advisors!” Learn More About Working With Lantern Capital Advisors