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Common mistakes that decreases a business’ value

A business’ value is everything to us as entrepreneurs. We want to create a business that thrives, retaining and increasing its customer base, delivering on promises and expectations. Yet, value is not easily obtained or maintained. So often, even the smartest business people make mistakes they should’ve known to avoid.

Forgetting profit margins

It might seem impressive if a business makes, say, $2 million a month. But that can become meaningless if its expenses are $1.9. Too often, we forget to truly appreciate profit margins, instead of revenue.

As Investopedia summarises: “Profit margin is part of a category of profitability ratios calculated as net income divided by revenue.”

As CEO Carl Erickson points out: “Profit alone doesn’t tell you as much as profit margin.” Margins are the first line of defence in a financial buffer. For Erickson, failure to focus on profit margins will decrease a business’ value and tend to indicate one that has a higher chance of ending up in trouble.

Any company interested in managing its corporate finance properly must consider this seriously.

Tough decisions

Faced with being able to keep the company alive versus employing an underperforming staff member is tough. A simple realisation sometimes is that there won’t be a company to pay this employee if we keep them, if they are harming the business.

Dick Grote, a management consultant noted: “Firing is the single most difficult thing we ask leaders to do… Even when the business justification is clear.”

Many might think that business people are merely empty suits, but often we are in positions where we know everyone. They rely on us for income and to be able to make ends meet. Yet, sometimes we have to end that relationship.

After all, it’s not merely one person we need to think of but many – including ourselves and our families. Failure and drawing out tough decisions can mean a business does poorly, since it means we’re paying for bad labour.

Not being vigilant

Sometimes success can be a cage. Business owners can look back at how the business is doing well and conclude nothing needs to change. After all, if it worked in the past, it will work in the future – surely? Unfortunately, as we now all know, the markets are incredibly volatile and new, powerful ideas are emerging all the time. Competition is no longer clearly defined, with various  businesses able to operate in multiple fields and suddenly dominate.

We must constantly be vigilant and think outside the box, no matter how successful we’ve been. It’s not one particular method that makes us good, it’s our ability to think creatively and carefully.

(Picture credit: Foto Infinity / Flickr)