Five things to avoid in your business

[Dave A]

One of the better business writings I've read this year so far starts off with:

Add value to your business in 2015 by avoiding these five mistakes:

1. Taking too much money out of your business
2. Giving away margin
3. Falling for lower fuel prices
4. Ignoring new technologies
5. Not learning something new

So by now the first of your 2015 resolutions have probably gone undone, ignored or broken.

Here are five things to NOT DO if you want to add some value to your business in 2015.

Seriously, it's well worth the read.
Nice one, Mark

[Greig Whitton]

Some good advice there, although I don't agree with the first point as presented in the original article (i.e. "don't pay out dividends"). Keeping surplus cash in a business makes operational sense, but I fail to see how it will add much value. If anything, I would expect paying out dividends (without compromising the financial health of the business, of course) to add more value by increasing investor confidence and expected return on investment.

[CLIVE-TRIANGLE]

Greig, valuations are generally done on profits, but then monies owed on loan accounts are seen as equity (negative) and will usually result in a downward revision of the price based on profits.

Retained income, from which dividends would otherwise be paid, is positive equity and at the minimum will support the valuation, and in some cases enhance it. Bear in mind that dividends will reduce equity and reserves, as well as cash.

[Greig Whitton]

Greig, valuations are generally done on profits, but then monies owed on loan accounts are seen as equity (negative) and will usually result in a downward revision of the price based on profits.

Retained income, from which dividends would otherwise be paid, is positive equity and at the minimum will support the valuation, and in some cases enhance it. Bear in mind that dividends will reduce equity and reserves, as well as cash.

This makes perfect sense, but much depends on the valuation approach. Here's my take from an investor's perspective:

Company X consistently generates annual net profit after tax (ANPAT) of Y.

By virtue of consistently generating Y, Company X is worth Z.

If Y is retained within Company X, then the value of Company X is Z + Y.

If Y is distributed as dividends, then the value of Company X is just Z.

As I see it, retaining the income may raise the purchase price but it's not increasing the inherent value of the business unless it serves a strategic purpose (e.g. to settle liabilities or acquire capital assets that will enable the business to grow ANPAT).

To use a facetious analogy, does a rental property have more value (in the sense of ability to create wealth) if the rental income is stashed under the floorboards and made available to the new owner?

[CLIVE-TRIANGLE]

As I see it, retaining the income may raise the purchase price but it's not increasing the inherent value of the business unless it serves a strategic purpose (e.g. to settle liabilities or acquire capital assets that will enable the business to grow ANPAT).

Agreed when it is a proposed sale of a going concern, but it does when the proposed transaction is share based. The net assets (which is the equity and reserves) will always be a factor because it underpins liquidity. I think it was from this viewpoint that article was written.

[AlbernAlbern]

I visited the link given above into your post. Contains great ideas there. I have read all of this. Sure will be reference long into the future.