Tag Archives | value

Book Value of Equity Per Share (BVPS)

See also:
Price to Book Value Analysis
Price to Sales Ratio Analysis

Book Value of Equity Per Share (BVPS) Definition

Book Value of Equity per Share (BVPS) is a way to calculate the ratio of a company’s Stakeholder equity (as stated in the balance sheet) to the number of shares outstanding. Investors commonly use BVPS to determine if a stock price is under or overvalued by looking at the company’s current state.


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Book Value vs Market Value

Investors use both Book Value and Market Value to build strong portfolios. The market price of a stock provides hints to the company’s future growth and financial stability. The book value reveals the current state of a company calculated by its balance sheet. Using both values can assist you in determining whether a stock is valued correctly, thereby helping you invest your money wisely. For example, a company’s BVPS is $4 and the market value is $10. In this case, it does not necessarily mean that the stock is overvalued. However, it might mean that the company’s assets have a high earning power or potential. In comparison, it doesn’t necessarily mean it is an undervalued stock if a company’s BVPS is $4 and the market value is $2. Instead, it might mean that the financial market has lost confidence in the company’s ability to generate future profits.

Book Value of Equity Per Share Formula

Calculate the BVPS of a company by dividing total stakeholder equity (excluding preferred shares) by total shares outstanding. Refer to the following formula to calculate BVPS:

BVPS =  Value of Common Equity / # of Shares Outstanding

Example of Book Value of Equity Per Share (BVPS)

For example, ABC & Co. has $30,000,000 of stockholder’s equity, $7,000,000 of preferred stock, and an average of 5,000,000 shares outstanding during the period measured. Calculate BVPS using the following formula:

$30,000,000 Stockholder’s Equity – $7,000,000 Preferred Stock ÷ 5,000,000 Average Shares Outstanding

= $4.60 Book Value Per Share

Download the Top 10 Destroyers of Value to identify any destroyers of value and maximize the potential value.

Book Value of Equity Per Share (BVPS)

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Book Value of Equity Per Share (BVPS)

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ROCE (Return on Capital Employed)

See Also:
ROE (Return on Equity)
ROIC (Return on Invested Capital)

ROCE (Return on Capital Employed) Definition

ROCE stands for Return on Capital Employed; it is a financial ratio that determines a company’s profitability and the efficiency the capital is applied. A higher ROCE implies a more economical use of capital; the ROCE should be higher than the capital cost. If not, the company is less productive and inadequately building shareholder value.

ROCE Formula

Use the following formula to calculate ROCE:

ROCE =  EBIT/Capital Employed.

EBIT = Earnings Before Interest and Tax
Capital Employed = Total AssetsCurrent Liabilities.

Calculating Return on Capital Employed is a useful means of comparing profits across companies based on the amount of capital. It is insufficient to look at the EBIT alone to determine which company is a better investment. You also have to look at the capital and calculate the ROCE. Many consider ROCE a more reliable formula than ROE for calculating a company’s future earnings because current liabilities and expenses.


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ROCE Example

Look at the following table to see the importance ofReturn on Capital Employed (ROCE) in action.

Return on Capital Employed

Both Company A and Company B sell computers. Company A represents the Old Factory model; they are a distribution company that sells business to business. Company B is the New Factory; they are also a distribution company, but they sell on the Internet via credit card. Due to this modern convenience, Company B is able to receive payment within two days instead of the forty-five it takes Company A.

If you were to just consider EBIT, then Company A looks like the better investment at 7% return on sales compared to Company B’s 5%; however, with such a large DSO number, Company A is out $6,000,000 more than Company B at any given time. This means Company B needs less capital invested in the company which would result in a higher return on equity (ROE).

Thirty years ago, a similar scenario played out between IBM (Company A) and Dell (Company B). In his college dorm room, Michael Dell started taking credit card sales over the phone and was able to grow a billion dollar company with very little capital.

If you don’t leave any money on the table, then access our Top 10 Destroyers of Value to discover what areas of your business need to be attended to.
Return on Capital Employed

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Return on Capital Employed

(Originally published by  on June 9, 2016)

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5 Signs It’s Time to Restructure Your Company 

signs it's time to restructure your companyOver the course of my 28+ years of financial experience, I’ve had a number of restructuring transactions. What I have found is that many companies do not know when it’s time to restructure their company. Instead, they wait until it’s too late and it becomes a liquidation event.  Restructuring can mean different things, there are restructuring engagements that take place through the legal system such as bankruptcy, and there are out-of-court restructuring.  In this blog when I mention “restructuring,” I am referring to out-of-court restructuring. In this week’s blog, we’re looking at the 5 signs it’s time to restructure your company.

What is Restructuring?

Restructuring is when you change internal operations processes, positioning in the marketplace, restructure debt, modify your operations and work towards becoming a more profitable and cash flow positive business. There are several reasons why companies undergo restructuring.  Usually, they are feeling a financial pinch. Most business leaders actually wait to long to restructure their business. In 2014 with the fall in oil prices, I actually saw companies with direct impact wait to make any changes. Those that saw the writing on the wall and took aggressive action early on are the ones that survived. Whenever you see external or internal factors affecting your cash flow and financial performance, you need to take a hard look at them and do not wait to make changes.

Several of the signs its time to restructure are also destroyers of value. If you are crafting your exit strategy now, then download our Top 10 Destroyers of Value to make sure you don’t leave any money on the table.

Signs It’s Time to Restructure Your Company

Now, you know what restructuring is. The next question is… When? There are several signs it’s time to restructure your company, but we’re going to look at the top 5 indicators that things need to change.

signs it's time to restructure your company

1. Trends Are Not Looking Good

Hopefully you have dashboards in place and financial reports that allow you to track trends such as your trailing twelve months margins, ratios and a 13 week cash flow forecast in addition to an annual budget. If these tools are painting a picture that your business is not performing, then corrective action should take place sooner than later.  If after your corrective actions, the trends are still negative, then you may consider a broader restructuring of your business.

2. Over-Leveraged

For the past 10 years, the cost of money has been cheap. Banks, asset-based lenders, and investors are all looking to place money to work. With low interest rates and excess liquidity, companies have had access to cash in the form of debt. Debt is not all that bad if it is managed wisely and you do not exceed the amount of debt that your balance sheet can handle. The ease of acquiring debt has led to some companies having to much debt  – over-leveraged.

What is too much debt? Well it depends on your business and your balance sheet. Commercial banks have the most conservative ratios, but I would say that even some of those may lead to too much debt. If you have too much debt, then you may find yourself needing to restructure your company. If the debt is more than you can pay, then you will likely find yourself in a legal reorganization, such as court protection through a bankruptcy process.

An investor will not invest in a company that has too much debt. If you are seeking investment, financing, or want to sell, then learn about the Top 10 Destroyers of Value.

3. Changing Markets

I can think of two current markets that have changed or are changing today. If you are in these either of these markets, then you will need to consider restructuring your business. The first is the retail real estate market businesses that own malls or large shopping centers. Online sales have totally changed this market. Large department stores are disappearing as more and more retail customers are shopping online. Owners of malls in many areas are having to restructure their business and find alternate uses for the real estate. The second is the off-shore oil and gas industry. This sector has not recovered yet, and it is going to be a long haul. Boat companies, offshore suppliers, and service companies are having to come up with a new way to survive.

If you find yourself in a market that is either disappearing or dramatically shrinking, then you need to take drastic action and restructure your business. If it is a permanent change in the market, such as the market change of renting movies to Netflix, then you may find yourself in the same position as Blockbuster which just disappeared. Hopefully, the executives and your Board of Directors have a keen eye on the markets you are in and how technology is affecting them.

4. Environmental & Technology

The world has become smarter about taking care of our environment. Technology is helping us do this more and more efficiently. 20 years go, an electric car was more of a concept only and cost prohibitive from a manufacturing standpoint. Today, there are several cars in the market that are more affordable and manufacturers are bringing prices down every year and new models coming out.  The major automakers know this and are planning ahead.  For 100 years now, cars have run on on oil based products. If your business is tied to gasoline engines, hopefully you are looking to restructure your manufacturing or market. The environment can also bring major changes. Do not think of just taking care of the environment versus pollution, but bad weather can also force you to change. Sometimes, for the better. I was talking to a client recently in the mid west part of the country. They can not find contractors to fix roofs because they are all down in the Gulf Coast.  How about a new roofing business in the mid west? They continue to have the need.

signs it's time to restructure your company

5. Regulatory Environment

Government is getting bigger and bigger. Every year, there are more and more regulations changing how the business world operates. If you are in a market that has new regulations, then this may be something that will cause you to change how you operate. You may find yourself restructuring your business to either adapt to the new regulations. Or you may find your self restructuring your business to get away from the regulated environment.

Protect Your Company From Destroyers of Value

Restructuring your company protects your company from destroyers of value; however, you should always be looking at how to improve the value of your company. Locate other areas that are destroying the value of your company with our free Top 10 Destroyers of Value whitepaper.

signs it's time to restructure your company

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signs it's time to restructure your company

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Does Your Business Need A Financial Audit?

The question we’re answering is, does your business need a financial audit? Before we get to that, let’s define financial audit. The term audit can mean many different things. You can audit operations, taxes, health safety and environmental, manufacturing processes, and your accounting records. When we refer to an “audit”, we are referring to an audit of your accounting records. That is, a financial audit of the accounting transactions for your company for a specific period of time and based on U.S. Generally Accepted Accounting Principals (“GAAP”).

does your business need a financial auditFinancial Audit Background

In my career, I have dealt with audits and auditors for companies as large as multi billion in revenue with international operations and as small as $15 million in revenue and closely held. I have also dealt with auditors from each of the Big 4, as well as from small local CPA firms. In 28 years working experience, I have been exposed to a variety of situations with financial audits and auditors.

In those 28 years, the big change in audits and auditors came in the years following the Enron debacle. The public markets, SEC, IRS, and Congress had to shift dramatically because of what happened at Enron. The Enron experience brought a landslide of changes to accounting, audits, and auditors. Pre-Enron, the audit process was much easier and less regulated. However today, the audit process is fairly complex. Furthermore, auditors risk their careers every time they go through an audit. And it is truly a regulated process. Their heads are on the line. If they make mistakes in the audit or if they do not follow the audit guidance then they risk, being sued, losing their job, or even going to jail due to negligence or even large mistakes.

The consequences for a bad audit are heavy for a reason. It’s because their work is so vital to a company’s success. To find other areas of value to improve upon, click here to access our Top 10 Destroyers of Value to address those areas that are currently destroying your company’s value.

Types Of Assurance Services

Assurance services provided by CPAs are broken up into the following three types of services:

  • Audits
  • Reviews
  • Compilations

Audits are the highest form of assurance offered by accountants.

Does Your Business Need A Financial Audit?

I get this question often, and it is a very good question. Does your business need a financial audit? My response is always, it depends on the size of your company, type of company, and the ultimate goals and objectives. For example, a micro company of $2 million in revenue that has 5 employees and is closely held. It has no plans of selling, and it is not it is growing exponentially and has no debt. In this example, the company really has no need to get an audit completed. Instead, save the money, and move on.

But, if you are a growing $2 million company that is backed by investors and has (or plans on having) some debt, then it is worth getting a financial audit complete. Also, you will need to complete an audit if one day you want to go public.

The most common situation I deal with is a company with revenue between $15 million and $200 million. They are a closely held business that has some debt. And it may or may not sell at some point. They have 20-200 employees and want to continue growing. In this scenario, I always recommend and actually push to have this company get their financial records audited by competent CPAs.

does your business need a financial auditRecommendation To Complete An Audit

Why would I recommend for this type of business to complete an audit? The audit is NOT designed to eliminate all risk, catch all errors, or provide any guarantees. But the audit will provide peace of mind that your accounting records properly represent the financial condition of the company based on GAAP. Why is that important? Because your financials are now of such quality that you can truly use them as a tool to properly run your business. Not only that, but you are adding value to your company by having an audit complete. Users of your financial statements will also have a positive sense of quality as it relates to the numbers you are presenting.

Does your business need a financial audit? If you want to increase value, then yes! It will help you identify areas of value improvement. In the meantime, click here to access our Top 10 Destroyers of Value to discover other areas of improvement.

Benefits Of A Financial Audit

Some of the benefits of a financial audit include:

  • Enhanced quality of the financial statements
  • Third parties, such as banks, investors, private equity groups, insurance companies, valuation specialists, will look at your company as one that is enhanced and one that cares about quality and is a “better company” because you have audited financials
  • Third parties such as banks and investors may require you to have audited financial statements
  • If you ever plan on going through an IPO, then you will be required to audit your financial statements
  • From a valuation perspective, you have added value to your company because you have audited financial statements
  • If you ever plan to exit, then buyers of your company will look at you as a better company versus the other company they are looking at that does not have audited financial statements (value)
  • Peace of mind for you as the CEO or owner. Although the audit performed by CPAs does not guarantee there is no fraud in your company and that you do not have any “leaks” of cash, there is a good chance that if there is any wrong doing, fraud or “funny stuff” going on, then completing an audit might pick up on these things
  • The audit will look at your internal controls and the auditor should provide suggestions on how to improve them

Complete a Financial Audit on an Annual Basis

The numbers behind the accounting records are still management’s responsibility, but an audit will provide an additional layer of excellence. There are other benefits of going through an audit, but I wanted to name a few that come to mind. The audit is not a one time thing. Consider completing a financial audit on an annual basis. Furthermore, this should be part of your best business practices. This really does distinguish your company, adds value, and will make your company a better company in many ways.

Cost Of A Financial Audit

The cost of an audit will depend on many things. Things that will influence the cost of your audit include the following:

  • Size of your business
  • Complexity of your business
  • Number of transactions per year
  • Number of legal entities
  • International or U.S. based
  • Private or public company
  • A lot of inventory in multiple locations, or no inventory
  • Multiple locations or single site
  • Service or Manufacturing

Who You Should Use To Complete The Audit

The cost will depend on who you use to complete the audit. Most CPA firms that perform audit services bill hourly. Large Big 4 firm have higher hourly rates. Small firms may have lower billable hourly rates. I have many friends in Big 4 firms, and I think very highly of the Big 4 firms. But I would say that a $100 million revenue company with 200 employees located only in the U.S. should look at alternatives other than the Big 4. There are many great regional and local firms that can complete the audit for a much lower cost.

Be careful though! Not a knock on small firms, but a firm that provides audit services should have multiple resources and skill sets to complete an audit. Just because a sole proprietor CPA offers to complete an audit for $10,000, it does not necessarily qualify him to do it. Remember, you do get what you pay for. A small company with not too much complexity and a few employees, single location will probably spend at least $20,000 for an audit, and it goes up from there. This should be something you include as a line item in your annual budget.

Increase Value Through A Financial Audit

With proper guidance from your strategic advisor, you will get value for your audit no matter what the price you pay. You do have to manage your auditors just like you need to manage your attorneys. But a well-run audit by a good firm will pay for itself multiple times over in incremental value to your business and peace of mind. In addition, locate other areas that are destroying the value of your company with our free Top 10 Destroyers of Value whitepaper.

Does Your Business Need A Financial Audit

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Does Your Business Need A Financial Audit

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Why You Need a New Pricing Strategy

Larry is operating a lemonade stand, and he thinks that his lemonade is the most valuable drink available. Because he interprets his lemonade as highly valuable, he decides to charge $85 for a glass of lemonade. Larry wonders why no one buys his lemonade. Although he may seem highly profitable when you work out his unit economics, he has not sold a single glass of lemonade. Like Larry, you may need a new pricing strategy.

What is your current pricing strategy? For example, you may be setting the prices on your perceived value of your product/service like Larry. But have you thought about how you could price your products/services better to improve your company’s profitability?

need a new pricing strategy

What is a Pricing Strategy?

To determine if you need a new pricing strategy, you need to identify what pricing strategy you are currently using.

Often, pricing is seen as the marketing and sales department’s role. But as the financial leader’s role morphs into a value adding position, you must work with every department (including marketing/sales) to be able to squeeze profits from every corner of the business.

The Variety of Pricing Strategies

When you are looking for a new pricing strategy, you should assess the different types of pricing strategies and the reasons for picking a one over another. Some of the more common pricing strategies include neutral, penetration, forward, skimming, and value-based. Although there are other strategies that we could dig into, these are among the most popular.

Neutral Pricing Strategy

The first pricing strategy that companies can use is the neutral pricing strategy. As the most common strategy, businesses price their products or services so that their customers are indifferent between a competitor’s product and yours. After taking into account all the features and benefits of the product, the price is set – essentially making you neutral in the pricing game.

While this may seem intelligent, it makes it difficult to expand your customer base as they have no real reason to choose your product over another of the same price. There is no value expressed in the neutral pricing strategy – thus, limiting the profit capabilities.

If you want to gain more profit margin, neutral pricing strategy is a safe (and ). To price your product or service correctly, download our Pricing for Profit Inspection Guide whitepaper!

Penetration Pricing Strategy

If you want to be more aggressive than the neutral pricing strategy, you may want to choose the penetration pricing strategy. This strategy is used to gain market share, but it has several drawbacks. For example, price wars can start between competitors. Because you don’t want to lose your market share, you may be tempted to lower your prices. But your competitors will likely lower their prices as well to compete for their customers. If you continue to lower your prices, your margin will be squeezed until you are unprofitable.

Grocery stores most commonly use the penetration pricing strategy. Most recently, Amazon acquired Whole Foods (a traditionally expensive grocery store chain) to compete with other grocery stores such as Walmart, Target, Kroger, and other local stores. As Whole Foods slashes their prices, stock prices in major grocery stores have declined in anticipation of them having to reduce their prices to compete. It’s too soon to see the result of implementing a penetration pricing strategy; but unless these stores gain more customers or offer other profitable products, they will become less profitable.

Forward Pricing Strategy

Like the penetration pricing strategy, a forward pricing strategy focuses on the future costs associated with that product or service. Companies are willing to price below cost of goods sold at first if they know that in the future, they will have higher margins. If a company cannot predict that if they sell X units by Y date, then having a forward pricing strategy may not be the best strategy for your business.

If you need a new pricing strategy, you need to think about pricing for profit. Download our Pricing for Profit Inspection Guide to learn if you have a pricing problem and how to fix it.

Skimming Pricing Strategy

Converse to the penetration pricing strategy, skimming pricing strategy allows companies to segment the market to gain access to those customers who are willing to spend more per unit. Most commonly, a company utilizes skimming at two different periods in the product life cycle, the beginning and the end of the product’s life.

Apple’s Skimming Pricing Strategy

For example, businesses that are in a semi-monopolistic positions use the skimming pricing strategy when launching the product. Think of the iPhone. Apple set their prices for the iPhone high as they were only wanting to sell to those customers with the willingness and ability to pay. As that small market depletes or slows down, Apple reduces their prices to sell to the next tier and then the next. Recently, Apple released the next generation of iPhones – iPhone 8 and iPhone X. If you’re looking to access the iPhone 8 with 256GB, expect to pay $849. You can get the iPhone X for $1,149 with the same storage as the iPhone 8.

If you look at the prices of each of their products, expect to pay 2-3 times as much for a similar product compared to other competitors. So how are they so successful? Apple has created a culture in which people are willing to spend a large amount to remain in the Apple community. Unfortunately, not every company will be able to replicate Apple’s pricing strategy. But it’s important for you as a financial leader to study what other brands are doing in regard to pricing.

Value-Based Pricing

Ask yourself this question: How much is your customer willing to pay for your product or service? There is a price that your customer is willing to pay for something without having any knowledge to how much it costs to produce or anything else. Value-based pricing is the next pricing strategy. While implementing this strategy is not simple, you can potentially gain more profit than using any other pricing strategy available.

In business school, students are taught to use the cost-plus method. Instead of adding value with their product, business leaders simple decide on the margin that they would like to have. There’s no real thought process in cost-plus pricing, but it is an easy way to bypass your customer and be in sync with your competitors.

For example, Apple has created a value for its products. They didn’t decide on a margin, but instead established such a perceived value that people cannot wait to get their hands on the next product. Some have converted all their technology over to Apple because of that added value. It’s not going to be the cheapest technology on the market and may not even be the best. But the customer is willing to pay for it at the price Apple has set. According to CNN, Apple is worth $750 Billion so they are doing something right!

need a new pricing strategyWhy You Need a New Pricing Strategy

Unfortunately, your company may be pricing your products or services too low (or too high). And your customers are not buying. You may need a new pricing strategy. Ask yourself some of the following questions:

  • When did you last interview your customers about your pricing?
  • When did you review your pricing strategy last?
  • Have you ever tested your pricing on different groups?
  • Which markets have you not be able to get into yet?

Pricing is the basis of your business and is the most important factor in profitability. If your company is solely relying on something other than pricing to improve profitability, you may need to assess why.

Buttress The Business

As you decide if you need a new pricing strategy, assess whether your pricing is a buttress of the business. We can agree on the fact that businesses exist to provide real value. Your business should be structured to support and validate the reason for the price per unit (and the value provided). McKinsey & Company highlights that most businesses do not pay enough attention to their pricing!

Most businesses fail to test customer value perceptions and price sensitivity after products launch and have no idea how the critical trade-off between price and volume shifts over time. Second, companies must make pricing decisions in the context of their broader product portfolios because when they have multiple generations of a product in a market, a price move for one can have important implications for others.

Increase Profitability

Price Intelligently references to a “landmark study [that] was published in a 1992 Harvard Business Review by Michael Marn and Robert Rosiello, both senior pricing folks at McKinsey and Company. The dynamic pricing duo studied the unit economics of 2,463 companies and found that a 1% price improvement results in an 11.1% increase in operating profit, which compares to 1% improvements in variable cost, volume, and fixed cost only resulting in profit increases of 7.8%, 3.3%, and 2.3% (respectively)” Having a value-based pricing strategy will improve your profitability. If you are looking to drive more profits this next quarter, you need a new pricing strategy. To learn how to price for profit, download our Pricing for Profit Inspection Guide.

need a new pricing strategy

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need a new pricing strategy

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Ethics Affects the Financial Results of a Company

ethics affects the financial resultsWhen you think of Enron, WorldCom, and Arthur Anderson, what do you think? Do you think of how successful and innovative they are? Do you want to be their financial leader? Their use of questionable behavior to squeeze more margin and gain more market share has caused each of these companies to be challenged. But today, we are arguing that good ethics can affect the financial results of your company in a positive fashion.

How Ethics Affects the Financial Results of a Company

Although ethics does not have a “price tag“, we have seen the impact of questionable ethics. Stock prices take a dive, customers leave, protests occur, and other companies restrict their ability to do business together. Yet some companies survive because some consumers are willing to overlook ethics in order to get the best price.

If you’re looking to destroy the value of your company, having poor ethics is a guaranteed way to go. Click here to learn about the Top 10 Destroyers of Value and how to increase the value of your company.

ethics affects the financial results

Good Ethics Affects the Financial Results Positively

One brand that comes to mind when thinking about good ethics is Patagonia, the outdoor clothing and equipment retailer. Take a look at their mission statement: “Build the best product, cause no unnecessary harm, use business to inspire and implement solutions to the environmental crisis.” Unfortunately, we are not able assess the financial success of the company as it is a private entity. But Patagonia has gained the loyalty of customers. Now, they sell their products in 150 countries because of the ethical decisions they made.

Poor Ethics Affects the Financial Results Negatively

Regulators believe that Volkswagen may have lied about the fuel efficiency of their vehicles. Most aircrafts have banned the Samsung’s Galaxy Note 7 because it has caused multiple injuries due to its exploding batteries. But they could have prevented this recall of three million phones by adjusting the design of the product. Unfortunately, bad ethics affect the financial results and profitability of the company. Unlike companies who hold themselves accountable and obey the law, other companies fail to maintain their integrity and seek to gain every bit of profitability by cutting much needed corners.

You as the financial leader of your company need to manage the standard of ethics maintained in your company. Consequently, this means that marketing, sales, operations, finance, manufacturing, etc., all need to adhere to a strict code of ethics to gain huge value. If one leg of the company falls short of these standards, the whole company falls.

Enron: A Company Once On Top of the World No Longer Exists

“America’s Most Innovative Company,” Enron, once ruled the energy world – growing and blooming into a highly profitable company. But behind closed doors, masterminds were putting together one of the greatest accounting fraud and corruption scandals in recent history. Enron and their relationship with the Arthur Anderson accounting firm is now the perfect example of how important ethics is and how unethical decisions can disrupt thousands of lives. As executives were inflating financial records and participating in insider trading, they were in a downward spiral.They inflated the numbers and prevented themselves from being caught the first time. Thus, forcing them to repeatedly inflate the numbers to cover their tracks. Unfortunately, auditors at Arthur Anderson did not report this fraudulent behavior either.

As a financial leader, you must maintain the utmost level of integrity especially when it concerns financial records and reporting. If you are looking to sell your company or undergo a capital valuation, make sure your ethics are not destroying the value of your company. To learn about other potential destroyers of value, download our free Top 10 Destroyers of Value whitepaper.

Equifax – The Enron of 2017

As the second largest security breach in the world, Equifax is facing numerous issues – including possible insider trading, not protecting the security of customers, and not promptly responding to this breach. The Wharton School at the University of Pennsylvania discusses this Equifax issue and reports that the CFO was not informed about the breach. Equifax is struggling to maintain its discretion with Social Security Numbers, the most important number Americans have. This breach impacted over 143 million Americans.

How could Equifax have prevented this breach and improved their position?

  • Respond quicker to the situation
  • Invest is better security measures, rather than settling with a mediocre security

Even though the breach occurred in July, most Americans did not find out until early September. We currently don’t have the details about what happened during that period. But Equifax should have released information about what was going on sooner. In addition, a company that deals with highly sensitive information should have had the best possible security measures in place to prevent this type of nightmare.

ethics affects the financial resultsGood Ethics Returns Huge Value

Unfortunately, we have seen many companies forget their ethics and tumble to their inevitable demise. But there are companies that have found that good ethics return huge value. The Guardian newspaper states that “the way the values represented by the code are embedded in the organization which makes the difference. The more the values are lived, the better and more consistent the decision-making at every level, the greater the amount of trust, the more confident and motivated the employees and the less the chance of costly damage to the company’s reputation. The virtuous circle can be expected to embrace customers, suppliers and other stakeholders.”

Huge Value & Huge Profits

In a Wall Street Journal article, they conducted an experiment that measured what people would pay for an item based on ethics. They divided each testing group into three categories: highly ethical, control, and unethical. Those presented an brand of coffee beans regarded as highly ethical were willing to spend $9.71 a pound. Conversely, those presented with a brand of coffee beans considered much less ethical were only willing to spend $5.89. That’s a staggering $3.82! If you sell 1000 pounds of coffee beans, the difference in revenue is $3,820.

While that may not seem like a lot, think about this. Your cost of goods sold are $4.23. By being ethical, you have $5.83 margin whereas the less ethical brand has only $1.66. Which situation would you rather be in?

Ethics affects the financial results of your company greatly! If you want to access huge value and huge profits, it’s time to focus on your company’s ethical standards. Discuss with your sales, operations, and finance departments how you can be more ethical internally and present a high ethical standard externally. If you’re in position to sell or just want to prepare for a potential sale, download the free Top 10 Destroyers of Value whitepaper to learn how to maximize your value.

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A Tinder Moment: Unlocking Value from Vendor Partnerships

value from vendor partnerships

At The Strategic CFO, we believe in the saying “You scratch our back, we scratch yours.” Everyone always sees other businesses as a competition; to some extent, they are. But sometimes, you just need to let people make money.

As we’ve become more focused on optimizing technology, we have started to outsource tasks/projects to outside vendors nationally and, depending on the task, internationally. I was talking to my associate the other day, when we asked our vendor partner to help complete a project. She was concerned about pricing, and whether or not it was worth the money to ask our vendor to do the engagement. They charge about $25 per hour of assistance, and we needed easily 3 or 4 hours of advice.

In the past, this vendor has always stepped up and helped us. That’s because we give him business. Let’s explore why this is important…

Cutting Costs and Unlocking Value

What happens when you need to cut costs while still maintaining the same value? Everyone knows that increasing revenue and cutting costs increases your bottom line. But are you actually maintaining that value or are you manipulating that?

Let’s say you’ve already cut as many costs as you can, but you still need to cut more. This is where you have to make financial decisionsWhat do you value most – your profit or your relationships

Cutting costs doesn’t mean you have to cut out the relationship forever. In fact, unless they do something unforgivable or you won’t ever need them again, you should keep that relationship open. For example, our vendor doesn’t work with us 24/7. However, we still maintain the relationship by giving him tasks once every couple of months. They act as an extension of our team.

 Are you ready to unlock real value in your business? Click here to access our three best tools to unlock value! 

Business Meets Tinder

Have you ever used (or heard of) Tinder? Chances are you’ve at least heard of Tinder, especially if you live in the United States. Tinder is a location-based, social search mobile app that connects individuals based on their interests. It’s all user-based, so if the user sees your pictures and swipes right, that means the user would like to meet. If not, then the user probably doesn’t want to meet you, and swipes left to move on to the next person. If both users swipe right, then they have a match! The process is fairly quick, and users on average swipe 30 times per day! (Good thing I’m already married, right?)  

Making the Connection

So how does Tinder connect to your business?

Everyone has that “Tinder” business where you swipe right when you want them, but swipe left and disregard them when you don’t need them. This is a major issue. If we all treated business relationships like Tinder, then we would not have a lot of value, would we? If my associate “swiped left” from the vendor and moved ovalue from vendor partnershipsn to another person, we would not receive the same value. Business would be done quickly and no relationships would be formed.

Keep in mind that conducting vendor relationships is critical for your success. Think about that time when you needed help immediately… If you had a good vendor relationship, they would be able to fix the problem immediately as they already know your business. But if you were a habitual left swiper, then the new vendor would have to get up to speed… Slowing down your progress and leaving money on the table.

Healthy Business = Healthy Business

Ultimately, when you treat vendors frivolously, you’re setting examples for other businesses. Soon enough, those vendors will go out of business because many businesses use the vendors inconsistently and constantly look for a “better deal.” And what happens when that business goes bankrupt? All of the value they put into your company is now gone.

(Keep in mind, you have your own set of vendors AND you are your customer’s vendor. Healthy business equals healthy business.)

What you should really be doing is investing your money, time, and trust in one vendor per task. My associate ended up using the vendor she was skeptical about, because she realized that if she found a new vendor, we would have had to spend the time to get the new vendor up to speed and we would always be looking for someone better and cheaper. It’s a waste of time and time is money.

3 Buckets of Value

There are 3 buckets of value: cheap, timely, and/or good quality. A business can expect to have two of the three when it comes to investing in something valuable, but not all three. This is where you come in as a leader… the best way to solve this problem is to find a compromise.

Pick which bucket(s) you find more valuable. Use that as your foundation or guide to making vendor decisions.

Cheap & Timely

When I first started The Strategic CFO, I wanted everything cheap and timely because I believed in investing in something to get quality work in return. I was young and naive. Customers eat at fast food restaurants because it is cheap and timely, but it isn’t the best quality.

Let’s even use the Tinder example… Constantly looking for new vendors is a cheaper and possibly faster. However, quality is built over time, and you won’t see consistent quality over time.

So think about it… do you really want to compare your business to fast food or Tinder?

 If you like these stories and advice, we recommend you also check out our ultimate CFO resource! Unlock your value today! 

value from vendor partnershipsQuality & Cheap

I was talking to my associate and she told me that she bought a makeup palette from China for only $6, when the price in the United States is $52.00. The only downside is that it took 2 months to get it in the mail! When she finally received it, it looked as if she bought it here in the US. The same concept can be applied to outsourcing tasks internationally, because of the time and language barriers. Sometimes we don’t see the work for 2 weeks to a month. This is good for tasks that don’t need to be completed right away, such as graphics for a future project.

Timely & Quality

For this example, we can use salaries. If you look at your staff, they have to be timely and of good quality. That’s why salaries consume the majority of your expenses. This is because you invest in them for your company. If we started seeing vendor partner as valuably as we do staff, the timeliness and the quality of the work might actually pay off.

Conclusion

In conclusion, you can’t treat businesses like a commodity, because they will treat you like a commodity. You can have cheap, timely, or quality work. You can expect two out of the three, but not all three. If you want to unlock value from vendor partnerships in your business, they need to know they are valued. How can we do that? Let them make money!

If you want to learn more about how to add real value to your company, click here to access our 3 best tools AND learn more about The SCFO Lab.

 

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