Business Valuation • Author: Jane M. Tereba
How did 2024 go? The one number that tells the whole story
Another year has ended, and business owners are closing the books, preparing financial statements, and starting tax preparation. This is also a time for reflection—did day-to-day decisions lead to a successful year?
Most owners evaluate success based on:
- Revenues: Did sales increase?
- Profitability (Pre-tax Profit): Were we profitable?
While these metrics are indicators of past performance, they don’t provide a full picture of the business’s overall health. For example:
- Growing revenues while margins are shrinking may be a red flag.
- Increasing sales while accounts receivable turnover (collection) slows is not a good trend.
- Revenues increasing while bad debt write-offs are increasing is not good.
- Revenue growth driven by a single dominant customer may not be sustainable.
Even profitability can mask underlying issues. Is the owner neglecting needed reinvestments in technology, equipment, or facilities? Is high employee turnover tied to non-competitive compensation or lack of expected incentives?
Alternatively, there IS one number that provides a clear and comprehensive measure of business performance, especially when compared year-to-year:
The value of 100% of the business.
If the business’s value increases year-over-year, it’s a strong indicator of overall health.
Why?
A thorough business valuation goes beyond analyzing financial performance, incorporating both qualitative and quantitative factors. A well-done business valuation incorporates all the strengths and weaknesses of the business that financial statements alone will miss.
To truly assess the past year, consider how it impacted the value of your entire business. That’s the clearest picture of progress and business health..jpg?width=880&height=420&name=Team%20pic%20blue%20background%20(1).jpg)
