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You Can’t Afford Not to Spend Money on the Accounting Department

As a former CEO to some CEOs, this Blog is to my counterparts that “don’t know what you don’t know.”  I have seen time and time again closely held businesses that have experienced growth make the same mistakes over and over again. To the CEO that believes bookkeeping is a necessary fixed cost that should be minimized, here is a money making tip. You can’t afford not to spend money on the accounting department if you want to be successful.

The Big Mistake

Your company has grown over the years; you have experienced good times and maybe some bad times. Additionally, you have taken a nice paycheck and sometimes, some nice bonuses.  You got used to a certain life style. And you did all of this with a bookkeeper that does not cost you much.  But your company has grown. Still in the back of your mind, you know something tells you that you are not comfortable with your accounting records. But you elected to keep cost down for the bookkeeper and you do not spend much on accounting.

You Can't Afford Not to Spend Money on the Accounting Department

My Tax CPA Does It All

Maybe until now, some of you have your outside CPA that prepares your tax return also prepare year-end financials. This is not a knock-on tax preparers, but your CPA that prepares your tax return is an expert in one of many fields CPAs work in. For example, I am a CPA, but there is no way I would prepare my own tax return. Tax laws change way too often. I just want to maximize my deductions and pay my fair share of tax, but not more than that. That is why I have my tax CPA prepare the tax return.

But over the course of my career, I have found that most tax CPAs do not have operational expertise. They have not run a manufacturing or service business, nor have they had any P&L responsibility. The Tax CPA is considering accelerated depreciation, maximize expenses, etc. This is quite the opposite from a management set of financial statements. The role of the CPA Tax preparer is totally different from a “operational” CPA, Controller or even CFO.

Minimizing the Back Office For the Wrong Reasons

Most CEOs that I have worked with argue to minimize the cost of the back office. That includes the cost of preparing financial and accounting records. But think about this… The Securities and Exchange Commission (SEC) does not require public companies to prepare their financial statements according to Generally Accepted Accounting Principles (GAAP) because they pulled this out of thin air as another way to regulate.  The SEC requires public companies to prepare their accounting records and financial statements based on GAAP because it is the best way to present fairly the results of your financial operations to third parties reading your financial statements.  In other words, It’s the RIGHT way to keep your books!

In some cases where there is significant debt and exposure, some banks also require that the company present your accounting records based on GAAP – regardless of whether it is a Public or Private company.  Some debt situations even require an audit. The banks simply make it one of the covenants related to your debt. When you present your books and records per GAAP, you have accurate financial statements, everyone is assured your accounting is correct.

Click here to download: The Smart Back Office for SMBs

The Importance of Using GAAP

So, if a lot of brain power has been put into coming up with GAAP, and the general consensus is that GAAP is the right way to present your financials and accounting records.  Why would you as CEO not require that your financial statements be presented per GAAP?

I have been an “operational” type CPA for over 27 years now. In addition, I have held the office of CEO twice. I have used my expertise in public company environments and private companies both as an employee and as a consultant in the U.S. and in other countries. I have seen many very successful small, medium and large private companies and they were all keeping their financial records per GAAP. Yet, I have NEVER seen a significant company (not a micro or small business) be successful and properly run without keeping their books and records per GAAP.

So why is it that CEO’s of closely held (private) business still permit their accounting records to be kept some other way?   The answer: they do not want to spend money on a fixed cost such as accounting. But they will spend money on the sales team, hunting leases, extravagant meals or parties.

Not getting the basics down – such as GAAP – leaves money on the table when you are exiting the company. Increase value with our Top 10 Destroyers of Value whitepaper.

You Can't Afford Not to Spend Money on the Accounting Department

You Can’t Afford Not to Spend Money on the Accounting Department

These are real life examples and outcomes of minimizing the cost of your accounting department that I have lived…

The service company incorrectly books gains on U.S. dollar receivables. In conclusion, they had to reverse $8 million from earnings.

I have seen this one several times. The company does not have some large assets on the balance sheet, because their tax preparer said they used accelerated depreciation. As a result, the balance sheet assets are severely understated. Hint: your value is understated. IT’S ABOUT THE MONEY DUDE!

The manufacturing facility does not properly accrue costs. As a result, their margins are way off, and the CEO wondered why they were always short on cash.

The company did not properly reconcile accounts including cash. This led to fraud.

The company did not properly recognize revenue. In conclusion, the company was understating revenue by millions of dollars.

I can go on and on with more real-life examples.

If you do not have your financial statements presented per GAAP, how are they prepared and presented? Do you really know your margins in your P&L. Do you really have all your assets, liabilities and equity presented correctly? Is your P&L, Balance Sheet and Cash Flow statement presented correctly? Guess what? Your ratios that your controller or CFO should be analyzing are not correct.

Leadership Needs to Believe in GAAP

Why do you think Exxon, Walmart and all other public company CEO’s believe in GAAP?  I have also seen many small, medium and large closely held private companies keep their accounting records per GAAP.  These are all successful companies. They know their margins, they know where cash is, they know their ratios and guess what, they know how to forecast!

I have also seen time and time again good companies that have been around a while and have experienced growth, and NOT prepare their financials per GAAP.  And every one of these CEO’s and companies has the exact same issues.

  • They really don’t know their margins in their P&L
  • Some companies don’t even really know their actual revenue
  • There is always that doubt in the CEO’s mind as to what is really going on in the business
  • The CEO lives a stressful life
  • Every time there is even the slightest decrease in margins, there is even a bigger disproportionate stress on cash
  • If your books are not per GAAP, then most likely they are not on the accrual basis; if that is the case, then you are 60-90 days behind your business
  • Having your books on an accrual basis is just the first step. There are many other accounting rules, procedures and pronouncements to get your books per GAAP. Just because they are on accrual basis, does not mean they are per GAAP. GAAP “rules” actually change frequently

You Can't Afford Not to Spend Money on the Accounting Department

In Summary

In my consulting business, I have seen CEOs that are “smart” as in they know what they don’t know. They bring us in to get the problem fixed. Although it takes time and money, the CEO is fully supportive and we get it done. These are the companies that grow and ultimately have a successful liquidation event. Or they leave a well-run machine to their family or employees.

But it shocks me to continue to see companies as large as $120 million in revenue, with a couple hundred employees that have not professionalized their accounting department. No one knows the true margins. Everyone stresses out about the “accounting records.” There are no correct historical financials, and most certainly, there are no forecasts. Unfortunately, there is no analysis of the business at all. In some high margin “hot” industries, this works for a while. The sins are buried. But millions of dollars are lost without knowing it. But, since ultimately everything ends up in cash, when that “hot” industry has even a slight downturn, the CEO feels the cash crunch.

Whether you are trying to increase the value of your company or positioning it for sale, this issue of unknowingly leaking cash is a destroyer. Learn how to tighten your belts and increase value with our Top 10 Destroyers of Value whitepaper.

Don’t be Cheap

Don’t be cheap. Spend the money (which is usually less than the hunting lease) to get your books and records based on GAAP basis.  Get your priorities straight.  Continue to have a professional accounting department in your business. YES, you will spend more than you are currently spending. But you can’t afford not to spend money on the accounting department!

Consider this… I had one investment banker with a very large firm tell me the difference in a valuation of an acquisition target from a company that has accounting records per GAAP and solid accounting department versus one that does not have a professional accounting department and accounting records not per GAAP is a difference of 20%-30%.  I had another investment banker tell me the difference in valuation is “one turn of EBITDA”. The use of EBITDA and multipliers is often used in valuation.

So if your company generates $2 million EBITDA and the multiple used is a 5, then your value would be $10 million with a professional accounting department and books per GAAP. In comparison, your value is $8 million with an unsophisticated accounting department and accounting records not per GAAP. I don’t think your professional accounting department will ever cost you $2 million per year! But not having it will.

Not having your financial records per GAAP is one of the destroyers of value. If you want to protect the value of your company, download the free Top 10 Destroyers of Value whitepaper to learn how to maximize your value.

You Can't Afford Not to Spend Money on the Accounting DepartmentYou Can't Afford Not to Spend Money on the Accounting Department

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What is your business worth?

So, you’re considering selling your business… Whether it’s to pursue new opportunities or to get out while you can, you need to start thinking about your business from a valuation standpoint. Even if you don’t intend to sell your business in the near future, building a business to be sellable is a sound strategy. So, what is your business worth?

When It’s Time to Leave

How do you know when it’s time to leave? If you’re experiencing these signs, you should strongly consider creating an exit strategy for your business:

Sick and Tired

Sick and tired… Literally. Entrepreneurs by nature are constantly looking for new opportunities. As a result, business owners often feel tired, fatigued, and overwhelmed by the business. Imagine constantly building your business for 25 years… it never ends, and it gets exhausting! The natural reaction is to look elsewhere, but before you start searching for the next big thing, you have to take care of your current business first. After all, it is your creation.

Declining Revenues

Decline in company revenues. A decline in revenues is never a good sign for a company. Let’s say that you’ve been trying new methods for years now, but revenues continue to decrease. Even zero growth is a red flag that you should take action.

Keep in mind, some business owners make their decisions based on this one reason, and some make a move based on a multitude of decisions built up over time.

Market is Declining

The market for your business is declining. I used to work with someone that owned a small business before the attack on the twin towers. He flew in nurses internationally to work in his medical business, which provided him steady cash flow and a healthy bottom-line. The demand was also constant… until the terrorist attacks on 9/11. From that moment, it was more difficult to operate a business that relied upon flying in workers from other countries. The delay of bringing in nurses wreaked havoc on his business. Because of this difficulty, he decided to create an exit strategy.

When market changes are out of your control, the best thing to do is prepare. Getting your exit strategy ready before market changes force your hand is better than waiting for it to crash.

Partner Disputes and Relationships

Starting a business with partners is easier than exiting a business with them. This may be a legal issue, as easy as looking at a contract.

Sometimes, it does get ugly. Facebook is a great example. If you’ve ever seen “The Social Network,” you’ll probably recognize this story. Mark Zuckerberg and former business partner/investor Eduardo Saverin started Facebook together, but when Saverin displayed breach of fiduciary duties, Zuckerberg diluted Saverin’s stake in Facebook. This ended with Zuckerberg’s majority ownership and Saverin’s minimal-to-nothing ownership.

How would this relate to your business relationships? When starting a business, you want to choose a partner that will be able to carry out responsibilities completely. You also should flesh out your contracts, terms, and exit strategy.

“Life is like a box of chocolates; you never know what you’re gonna get.” 

Things happen in life, like getting married, divorced, sick, and busy.  What are your priorities as a person – what do you value most? Is a business more important than your family, or vice versa?

Are you in the process of selling your company? The first thing to do is to identify “destroyers” that can impact your company’s value. Click here to download your free “Top 10 Destroyers of Value“.

What is Your Business Worth? | Assessing Valuation Methods

There are different methods to assess the value of your business. Many of these methods are specific to the type of business you have.

Asset-Based Valuation

This method, as the name indicates, calculates total asset value minus total liabilities. This method is criticized, however, for its ambiguity in valuing assets. The assets may not have been recorded on the balance sheet, or may be unique or custom products that are difficult to value.

The method is best used when focusing on real estate or other similar investments.

EBITDA Valuation Multiple

This is the most popular method, and usually references the market in relation to your business.   Businesses typically sell for 3X-5X EBITDA, but this can vary widely depending upon the type of business and the buyer. The ratios are calculated by taking the market value of a business, and dividing it by EBITDA.

According to ValuAdder, EBITDA valuation multiple removes the following when you value your business:

Who should you give the valuation to?

So, who should you give the valuation to? There are two people you should give it to:


Investors or buyers calculate the value business based on more than just numbers. You might be selling to a current employee, someone well-versed in the industry, or a friend. There are many reasons a business owner might sell the business – relationships, cash flow, new opportunities.  Both the buyer’s and seller’s motivation will affect the price of a business, so it’s important to consider all of the angles and ensure that the method of valuation you choose accurately assesses the value of your business.

Want to know some of the things that may be hurting the value of your business?  Check out our whitepaper Top Ten Destroyers of Value to see where you might be leaving money on the table.

what is your business worth

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Multiple of Earnings

See Also:
Normalized Earnings
Adjusted EBITDA
EBITDA Definition
Valuation Methods
Business Valuation Purposes
EBITDA Valuation

Multiple of Earnings

Multiple of earnings is one way to value a business. It involves multiplying a company’s profits by a certain number to end up with a value. “Multiple of earnings” multiplies the “earnings” (or income or profit) of a year, or average of years, in order to come up with a figure representing the company’s worth in a sale.

In most cases, EBIT (Earnings Before Interest and Taxation) is the amount used for this first earning’s number. However, for companies ranging from several million dollars to several hundred million dollars, the “multiple of earnings” is often equivalent to the multiple of EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortization) instead of EBIT.

Determining what number the current profits are multiplied by depends on the stability of the business. For example, a company that’s very well-established, with a strong hold on the market, that can operate under or with an entirely new team might bring in a multiple of 8 to 10 times current profits. On the other end of the spectrum, a small, individualized business that relies solely on one service provider might acquire a multiple of 1 times current profits. In reality, most businesses are sold for a multiple of 3 to 5 times the current profits.

Using Multiple of Earnings for Business Valuation

There are many different methods for business valuation; however, the central method calculates multiple of earnings. You should consider some of the following questions before evaluating a company:

Is a seller using pre-tax earnings or post-tax earnings?

If you’re the buyer, remember to include your tax rate not the seller’s. If you are the one selling, pick which year of earnings to base the valuation on. Many sellers will use the current year’s earnings even if the second half has not occurred yet. Simply multiply the first half of the earnings to project through the year.

Do you use past profits or projected future earnings?

Most appraisers recommend using the profits from the last three years to establish more credibility in the sale; however, you can weight the more recent years more heavily, if the profits are increasing each year, to suggest projected income.

Are the current earnings an anomaly or are they consistent?

Many owners will sell after a spike in profits, but you should evaluate the business risk by looking at a more thorough review of a business’s earning history.

What’s the business’s climate?

How established is the business? Can it run without the current staff or leadership team? Are there competitors moving in that have yet to affect the company’s earnings? Is the economy growing or shrinking? What is the impact of new technologies on the industry?

(Are you in the process of selling your company? The first thing to do is to identify “destroyers” that can impact your company’s value. Click here to download your free “Top 10 Destroyers of Value“.)

There are many factors to consider when evaluating a company, and many aspects to include when determining the “true” value. Looking at the profits solely will not give you the full picture of a company’s worth.

Don’t leave any value on the table! Download the Top 10 Destroyers of Value whitepaper.

Multiple of earnings

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Adjusted EBITDA

See Also:
EBITDA Valuation
Calculate EBITDA
Valuation Methods
EBITDA Definition
Multiple of Earnings

Adjusted EBITDA Definition

Adjusted EBITDA is a valuable tool used to analyze businesses for the purposes of valuation and potential acquisition. Many also call it Normalized EBITDA because it systematizes cash flow and deducts irregularities and deviations. Use adjusted EBITDA as an additive measure to determine how much cash a company may produce annually and is typically used by security analysts and investors when evaluating a business’s overall income; however, it is important to note business valuation using Adjusted EBITDA is not a Generally Accepted Accounting Principles standard. As a result, do not uses it out of context as various companies may categorize income and expense divisions differently.

EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization and is a meaningful measure of operating performance as it allows businesses and investors to more fully evaluate productivity, efficiency, and return on capital, without factoring in the impact of interest rates, asset base, tax expenses, and other operating costs.

Adjusted EBITDA is a useful way to compare companies across and within an industry. Many consider it a more accurate reflection of the company’s worth as it adjusts for and negates one-time costs such as lawsuits, startup or development expenses, or professional fees that are not recurring, just to name a few. More importantly, adjusting EBITDA often reflects in a higher sale’s price for the owner.

Adjusted EBITDA Margin Calculation

Adjusting EBITDA measures the operating cash flow using information acquired from income statements. Measure it annually. But when you average it over a three to five year period in order to account and adjust for any anomalies, it is most beneficial. Generally speaking, a higher normalized EBITDA margin is preferred, and the larger a company’s gross revenue, the more valuable this new measurement will be in a future acquisition.

Are you in the process of selling your company? The first thing to do is to identify “destroyers” that can impact your company’s value.

Download The Top 10 Destroyers of Value

Typically, analysts will then normalize or adjust the standard EBITDA by considering other expenses outside the operating budget. Adjusted EBITDA is found by calculating the Net Income, minus Total Other Income (Expense), plus Income Taxes, Depreciation and Amortization, and non-cash charges for stock compensation.

At this point, you are probably curious how to calculate Adjusted EBITDA. The following is a simplified example of how you might begin calculating this formula for your business. Start with EBITDA; then add back value to your company by considering areas of excess and factoring in one-time costs.

Screen Shot 2016-06-08 at 9.24.05 AM

Differences between EBITDA versus Adjusted EBITDA

EBITDA and Adjusted EBITDA have a few key differences. EBITDA, or Earnings Before Interest, Taxes, Depreciation and Amortization, identifies a company’s financial profits by calculating the Revenue minus Expenses (excluding interest, tax, depreciation and amortization). It compares profitability while excluding the impact of many financial and accounting decisions. The EBITDA margin is an assessment of a company’s operating profitability as a percentage of its total revenue. Calculating the EBITDA margin allows analysts and investors to compare companies of different sizes in different industries because it formulates operating profit as a percentage of revenue.

Adjusted EBITDA, on the other hand, indicates “top line” earnings before deducting interest, tax, depreciation and amortization. It normalizes income, standardizes cash flow, and eliminates abnormalities often making it easier to compare multiple businesses. Examples of when you need to account adjustments while evaluating the value of a company for a buyer include:

Download the Top 10 Destroyers of Value to maximize the value of your company. Don’t let the destroyers take money from you!

Adjusted EBITDA

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How does a CFO add value?

Oftentimes, CEOs don’t see the value in a CFO… They ask “how does a CFO add value?” After hearing that countless times, I want to let you on a little hint.

A good CFO improves profitability and cash flow 1-2% of sales.

A few months ago, I was meeting with a young man named Nathan who was about 8-10 years into his career. Nathan had achieved his dream by becoming the Director of Finance for a mid-size entrepreneurial company. What could go wrong?

Nathan started getting frustrated because the company would not value him as a financial leader. They saw him as overhead. Leadership thought he could do more. They didn’t respect him. The financial leg of the company saw him as a cost centerHave you ever been in the same boat as Nathan?

Very quickly after his promotion to this position as Director of Finance, Nathan began to regret taking the offer.

How do you go from “overhead” to valuable?

Let’s go back to my simple answer: a good CFO should improve profitability and cash flow 1-2% of sales.

Increasing EBITDA

Most CEOs see CFOs as overhead, especially when they don’t make a positive difference to the bottom line, or EBITDA. Before Nathan was promoted to Director of CFO add valueFinance, there wasn’t anyone in a financial leadership position in the company. The company wasn’t financially managed.

In the case that there is no CFO or the past CFO was not successful as improving profitability and cash flow, it is reasonable to expect the new CFO to improve profits and cash flow by 1-2%.

For ease of explanation, we’re going to focus on increasing EBITDA simply because it’s difficult to mitigate interest, taxes, depreciation, and amortization. There are only a few ways to increase your EBITDA: increasing sales, reducing overhead and improving cash flow are some of these.

(Need to improve your cash flow? Download your free 25 ways to improve cash flow!)

It’s often said that the CEO drives sales and the CFO manages everything underneath that! It couldn’t be said more perfectly. But there’s one thing that I don’t necessarily agree with. If the CEO is only managing sales (keep in mind that you have to spend money to make money) and the CFO is managing operations and accounting, there’s an imbalance in financial management.

(Click here to read a case study to price for profit while utilizing the 3-legged stool example you’re going to read about below.)

A 3-legged Stool

CFO add value

You probably figured out now where we’re going with this. A 3-legged stool has… well 3 legs! Each leg is imperative for the seat to stand horizontal. People rely on there being 3 legs so they can rest and sit on the stool.

Sales, operations, and accounting go hand in hand. Revenue allows for the company to continue to operate. Operations fulfills the sales orders. But if you accounting doesn’t manage cash flow, then operations can quickly spend more than is coming in. If cash flow isn’t managed, sales could sell either at a loss or without collecting for x amount of days resulting in no cash.

#1 Reason Why Businesses Fail: No Cash

Cash is king. So if cash is so important, then why are financial leaders not valued?

Typically, companies see financial leaders as the weak link. Others in the organization don’t know their value.

How should financial leaders be valued?

What gets measured gets managed. If you’re not even looking at your records (i.e. historical data), then you’re probably not going to use those numbers to run your business.

A CFO needs to ensure that operations has enough cash to purchase inventory to produce the products that sales needs to sell. If the CFO is not working with the sales force to project sales, then you will easily miss sales targets. Thus, this results in miscalculated inventory levels.  Suddenly, the company is dealing with angry customers and no cash.

In short, the CFO is important. While a 1-2% improvement may not sound like much, a CFO of a $50 million company could add $500,000-$1,000,000 worth of value to the company. The value added in this case will certainly cover their salary and then some.

Just like a CEO can increase his or her salary by increasing the size of the company, a CFO can increase his or her salary by improving profitability and cash flow.  This is typically why the larger the company, the larger the salary. 1-2% of a $50 million company is a lot different than a $100 million company. If you as the CFO are able to add enough value to the company to cover your salary and then some, it’s hard for others to argue that you aren’t valuable.

Case Study

CFO add valueA couple of years ago, I had a client, Rob,  that owned a $135 million distribution company. Over time, Rob has accumulated a massive amount of inventory. When I went to find out where the company was bleeding, I identified that Rob’s cash conversion cycle had jumped significantly over the past 4 year period.

Rob and I were able to free up and reduce his daily sales outstanding (DSO) from 180 days to 90 days. This freed up $4 million in liquidity! By freeing up cash, Rob was able to add value to the company.

This is only 1 of the 5 ways to improve your cash flow that is included in our free white-paper!

If you are seeking to add real value as a financial leader, click here to learn the 5 Ways a CFO Adds Value.



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Why KPIs Are Important

You’ve probably heard the term KPI (short for Key Performance Indicator) thrown around before. You may have even considered using KPIs to manage your business. Before setting out on the path of developing and tracking your company’s KPIs, let’s first take a look at what KPIs are and why KPIs are important…

InvestopediaAccording to Investopedia, a KPI is simply,

A set of quantifiable measures that a company or industry uses to gauge or compare performance in terms of meeting their strategic and operational goals.

Sounds simple enough. But anyone who’s ever attempted to nail down their KPIs can tell you that determining what factors are really driving your business isn’t always straightforward. In fact, some companies spend months tracking metrics that turn out to have little or no impact on actual results. For advice on how to identify your KPIs, check out our KPI Discovery Cheatsheet.

Knowing that it may take some work, why should you take the time to determine the KPIs for your business? First, define what success looks like.

Define What Success Looks Like

Most likely, you have some idea what your goals are for the next year. The process of identifying and measuring KPIs forces you to look at what specific actions and behaviors will drive the company towards those goals.

For example, your goal is to increase EBITDA by 2%. When you work with your team, determine what factors are really driving EBITDA. Then, come up with some specific, actionable steps to achieve the goal.  There are many ways to improve EBITDA, but focusing on your company’s KPIs can help you develop your unique road map to success.

Focus Everyone on the Goal

It’s important to understand that KPIs need not all be company-wide metrics. But instead, it may focus on the operating efficiency of individual parts of the company which can then be related back to how those parts affect the whole. Developing and tracking departmental KPIs show how departments work together to achieve the company’s goals. They also show how individuals within each department can contribute to the company’s success. Tying everyone in the company to the same goal will provide a unity of purpose found in almost all successful companies.

What Gets Measured Gets Managed – Why KPIs are Important

Although there are many factors that drive success for a business, it’s difficult to know which factors are the most critical unless they are being tracked. If you aren’t looking at something, how can you tell if it improves or deteriorates? Determining key business drivers and tracking their progress will help ensure that nothing slips through the cracks.

To Encourage Accountability Using KPIs

Holding people accountable for results is tough. Unfortunately, if everyone thinks someone else is responsible then no one is truly responsible. Holding employees accountable for improving the KPIs under their control provides them (and their managers) with a yardstick to measure their performance.  Not only does the employee have a way to quantify how he or she has contributed, but managers can see which employees are contributing the most towards goals.

To provide an opportunity for small victories

Sometimes it’s tough to stay positive when goals are large and/or long-term in nature. Employees feel empowered to make a difference when they see the needle move, so breaking down the goal into its key drivers can give them the opportunity to achieve the goal in stages. Focusing on these “baby steps” along the way improves morale and keeps everyone focused on the prize.

What are some of the reasons you use KPIs?  Download the KPI Discovery Cheatsheet to start measuring your company’s KPIs today and leave us a comment and let us know your thoughts.

Why KPIs Are Important

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Enterprise Value (EV)

See Also:
EBITDA Definition
EBITDA Valuation
Adjusted Present Value (APV) Method of Valuation
Company Valuation Introduction
Valuation Methods

Enterprise Value (EV) Definition

Enterprise Value is simply the total market value of the firm which includes the value of all equity holders as well as debt holders. The EV method is often considered a better measurement for Merger and Acquisition (M&A) activity than most other valuations.

Enterprise Value (EV) Meaning

The enterprise value is a great measure for the total value of a firm and is often a great starting point for negotiations for a business. This is because the EV takes into account the debt holders which should be part of an acquisition price as the acquiring firm will be purchasing the amount of debt as well as equity. The valuation often takes place by using the formula below or by finding the EBITDA of the target and discounting it back at the WACC. The value is then derived by using some multiple or a perpetuity method may be better if a long term growth rate can be determined for the company.

Enterprise Value (EV) Formula

The EV formula is as follows:

EV = Common and Preferred Equity at MV + All Debt Obligations + Non-Controlling InterestCash

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