Three Numbers Every Business Owner Should Know

Why is Financial Planning for business owners different?

Most of you started or bought a business for income, freedom, or a sense of duty towards your family’s business. You’re probably successful, but how do you know if that’s enough and if it is, why stop there? It’s common sense that you should be paying attention to managing your most important financial asset. We encourage business owners to begin with the end in mind. To benchmark your business today, make meaningful adjustments and rapidly grow value so you can monetize the value of your business when you’re ready. For business owners to know if they’re on track to meet their goals, there are three numbers that they should know.

1. Profit Gap = The Profit You’re Sacrificing by Not Operating at a Best-in-Class Level = Best-in-Class Profit at Your Level of Sales – Your Actual Profit Key Points:

  1. For the purposes of this discussion, profit is best defined as earnings before interest, taxes, depreciation, and amortization (EBITDA)

  2. To ensure an apples-to-apples analysis, your actual EBITDA should be re-casted or adjusted for

  • Extraordinary or one-time events

  • Discretionary expenses that are tied to the owner

  • Expenses that are currently above or below market rates such as rent,

  • compensation and others

What good could you do in the business with that extra flow?

2. Value Gap = The Business Value You’re Sacrificing by Not Operating at a Best-in-Class Level = Best-in-Class Value if at Your Level of Sales – Your Actual Business Value Key Points:

  1. The basis of the Best-in-Class Value begins with the Best-in-Class Profit at Your Level of Sales (determined in the Profit Gap analysis)

  2. The Best-in-Class multiple is applied to the Best-in-Class Profit Your actual value should be based on your actual re-casted or adjusted EBITDA

How quickly would narrowing your Value Gap close your Wealth Gap?

3. Wealth Gap = The Additional Wealth You Need to Accumulate to Meet Your Goal = Your Net Worth Goal – Your Current Actual Net Worth (not including  your business) Key Points:
1.For the purposes of this discussion, do not include the value of your business

  • It is not easily converted to cash

  • You may or may not convert it into cash depending on what you decide to do with it

2. As you consider your net worth goal, identify:

  • What you truly need to live your life the way you would like

  • What you want

How will you bridge the gap?

Information for this post was provided by the Exit Planning Institute.

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