Business value is not all about taking two metrics and multiplying them together. For sure the final calculation always boils down to this simple idea, but the real skill in valuation is establishing the metrics to be used. One tool which we use, is the concept of momentum.
In the real world, momentum is the velocity of an object, multiplied by its mass. If you passed school physics with more than 30%, it may be something you remember. Momentum is also the difficulty one has in stopping something. Stopping a goods train going at 10km/h is a very different matter to stopping an Atos at 100km/h.
Think back a moment, if you will…. to when your last set of financials were given to you by your accountant or auditor, or whomever. I’m almost certain that one of the comparisons you made was recent sales turnover to last year’s sales turnover. Some would have expressed this as a percentage, and compared it to some inflation index.
But almost nobody will compare it to earlier years, or draw any meaningful conclusions. So here is a handy tool.
It is a small Excel spreadsheet with no macros. You use it like this:
- Only fill out the white spaces.
- Put in the name of your company, or some reference
- Decide whether your company has a February year end, or some other month
- Decide which year to use as your starting date
- Fill in the data from your financial statements. I use only the thousands, and I don’t bother to round up. It is not that sensitive. So if your sales turnover is 37,563,785-98, I would only put in 37,563.
This is what it will show you:
- What you are doing, is relating everything back to the first year, and expressing the result as a percentage. We call this an index.
- The line at the top of the graph when you finish, has been your historical top performer. Hopefully it is one of either your net profit before tax (NPBT), or your gross profit (GP).
- The least favourable result is to have the expenses curve at the top. This would mean that your expenses are outstripping your income. It is unsustainable.
- The steepest line in any one year represents the greatest growth in that year.
- The point in a line which is at the top at any particular year shows that up until that point, that element was the best performer.
- Having expenses as your best performer is not good.