The global economy is poised to recover in one or two years. Although inflation has not yet returned to pre-pandemic levels, the continued deceleration shows some sprinkles of hope. In response, the Fed maintains an interest rate hike pause, demonstrating the normalization of macroeconomic indicators. If this trend continues, it may proceed to cut rates thrice.

Meanwhile, the business sector sustains its rebound as business openings keep increasing. Yet, entrepreneurs remain cautious amid expectations of a slight economic slowdown despite the low likelihood of another recession.

Tracking business finances and assessing business valuation more frequently are some ways to ensure stability and sustainability. So, we will give you some tips to evaluate and improve business valuation during economic recovery.

Check Historical Performance

Checking the historical performance of your business enables you to gauge its current capacity to generate returns. It helps you determine how to maintain or improve your core operations. It is essential if you offer at least two products or services.

That way, you will know which products or services are the most buyable and viable.

Check your Profit and Loss Statement to assess your most recent performance. You can make monthly, quarterly, or yearly comparisons. Do all these since various factors may affect your business, and seasonality can cause notable changes.

For instance, you are offering travel and tour packages. The second and third quarters of every year may have the highest sales and profits since people travel more often during summer. Meanwhile, revenues during the first and fourth quarters may be much lower than usual.

Always check your historical sales to know how much of each product was sold in the most recent period versus the comparative ones. You should always compare sales with your operating costs to assess each product or service’s efficiency, cost-effectiveness, and viability.

Doing so lets you know the best quantity to produce and the price to set in line with market and macroeconomic factors. These can include demand, prices set by your competitors, and inflation.

You can check the Cash Flow Statement, particularly the Operating Section, for better precision. It corresponds with the changes in your income statement and operating assets and liabilities. The only difference is that it only accounts for actual cash transactions. So, it adds back non-cash expenses while deducting non-cash income.

Also, you should deduct the capital expenditures (CapEx) since it accounts for your PPE, which is crucial for your production. You will derive the Free Cash Flow (FCF). You can divide it by sales (FCF/Sales) to determine the portion of sales that has been turned into cash.

For instance, you generate an FCF of $500 and sales of $2,500. Your FCF/Sales Ratio of 0.20 ($500/$2,500) means you turned 20% of your sales into actual cash. It will be added to your cash balance in the Balance Sheet.

Lastly, you will have to check your Balance Sheet to assess the fundamental health of your business. Check your cash and EBITDA relative to debt using the Net Debt/EBITDA Ratio. It is crucial to do it if your business is capital-intensive since you heavily rely on cash and borrowings.

The derived value represents the number of years it will take to pay your debt. So, the lower the Net/EBITDA, the better. It will also tell you how liquid your company is and if you can or must expand.

You may also use the Quick Ratio, Asset Turnover Ratio, and Days Sales Outstanding Ratio.

Make Precise and Realistic Valuations and Projections

At this point, we assume you have already assessed the company’s financial health using those metrics. It is time to check your valuation or make projections. Doing so will give you a sense of direction and help you align the business operation with your goals.

Also, it is essential when looking for investors or planning to go public to raise capital.

While you cannot accurately project your financial performance over five to ten years, you can at least make it realistic. Projecting the Income Statement is straightforward.

In fact, you can easily project for five years even without taking a financial modeling course. You can forecast revenues by adding increments based on revenue growth expectations. Meanwhile, you can estimate your costs and expenses by getting their percentage of sales.

For instance, your operating revenue or sales is $1,000, and your costs and expenses amount to $450. Your costs and expenses comprise 45% of your sales. If you expect your sales to grow by 5% per year over the next five years, you can multiply your current sales by the sales growth. For your projected costs and expenses, simply derive the 45% portion of your projected sales. Check the table below to understand our example better.

Estimation Sample

You can also use the DCF or the Discounted Cash Flow Model, which is much easier than financial modeling. Using the DCF Model, you will not have to estimate all accounts and financial statements.

The value you derive is equivalent to the price of your business per share. So, if the DCF Model derives a share price of $50, and you issue 1,000 shares, your investor shall pay $50,000.

Observe the Market Landscape and Strategize

The sales you generate depend on more than the price and production volume. You must account for the external factors affecting your demand. That is why you should study the market structure to help you formulate pricing and marketing strategies.

Check the number of sellers in your community to assess the level of competition. Determine the prevailing price to gauge whether the ones you set are still competitive.

Once you get the necessary information, you can set strategic prices, production volume, and advertising to bolster sales growth and margins. You can also find ways to add a twist to your products or services for their uniqueness and appeal.

Motivate Your Employees

Your employees give life and meaning to your equipment and inventory. So, motivate them to ensure efficiency and productivity.

A competitive compensation package can be a good start. However, it can be challenging for small businesses, particularly startups. Even so, you can satisfy them with non-monetary things. These include soft-skills training to support their career growth, office decoration to maintain an aesthetic and relaxing ambiance, flexible work setup to ensure work-life balance, and town hall meetings to promote a sense of belongingness.

Doing all or most of these can take time and effort. But they can keep your workforce engaged and motivated. They can improve employee retention and productivity. This is much cheaper than posting on job websites and hiring and training new employees.

Invest and Expand

At this point, you may have already assessed your business valuation, projected financial performance, and boosted revenues and margins.

It is time to add more income streams to your business. You may increase your market presence by expanding your store location or acquiring businesses. You may also invest in another business, as venture capitalists do. Think like an investor and determine the valuation methods for the company you plan to invest in or acquire.

For starters, you may opt to invest in equities and debt securities. The economy is rebounding and supporting bond and stock prices, which can give returns in the long run.

Takeaways

Assessing and improving business valuation requires one to be meticulous and cautious. Doing so may take tons of patience and practice. It can still be challenging today as the economy hasn’t fully recovered. But it can help achieve success and deliver returns more than you expect.

The post How To Assess and Improve Business Valuation  appeared first on The Total Entrepreneurs.

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