In tough times, it can be really tempting to make big cut backs in staffing, marketing, business development, product innovation… you name it, to preserve your cash reserves and financial assets when new orders might be drying up, or confirmed orders are being cancelled. But never cut business value, if you can avoid it.
5 Questions on Business Value in a Crisis
At the Advisory Collective we counsel our clients to think very carefully about the nature of any cuts that you make, by asking some simple strategic questions:
- Do you know what the approximate value of your business is now, in “normal” business conditions ?
- Do you know what might drive the calculation of – and therefore potential increases or decreases in – that value ?
- If you cut back on the people and other assets of your business, either intentionally or through failing to protect them, how expensive and hard will it be to replace or regenerate them ?
- If you think that you will be forced to make cuts for business survival reasons, are you starting with the right facts about your financial circumstances and prospects (remember my “4Cs” article) ?
- If you do decide to make cutbacks, are you starting with discretionary costs and commitments that have the least impact on the underlying value of your business ?
Goodwill in Business Value
For most normally profitable, well established small businesses, their biggest asset is actually the internally generated “Goodwill” that isn’t recognised on the balance sheet (unless the business was purchased from someone else and that value was objectively calculated through the purchase price). When I am asked about what is included in Goodwill, I usually suggest the following things:
- Your brand as a differentiator (technically it can be valued separately, but usually it isn’t).
- Your high quality client, key supplier and other business partner relationships that drive repeat business (irrespective of whether there are fixed contracts in place or not).
- Your record for product innovation and quality and the IP that you have generated.
- The loyalty, engagement and discretionary contributions of your key people.
- Your commercially appropriate but value adding disciplines and processes.
- Your Values and ethical reputation.
- Your openness to positive change.
- Your willingness to proactively deal with risks while taking your opportunities.
- Your business’s capacity to defend and renew itself.
- How well your business compares to your competitors and substitutes.
So what can you do now to both preserve your cash reserves AND maintain your business value ? Because you never want to cut nerves or muscle when trimming what might look like “fat”, no matter how big the crisis may appear to be.