Musings on Business Optimization, Economics, and Vocations

When I review financial performance with managers of middle-market private companies I find, with few exceptions, that their focus is almost exclusively on their income statements. “It’s all about profit,” they say. “It’s all about the bottom line.” In practice many chase revenue, even unprofitable revenue, but most understand that profit is necessary and that increasing it is a good thing. It turns out, however, that it isn’t all about profit. Profit is very important, but there’s more to it than that. And some of the pieces of the puzzle can be found on the balance sheet. Here's one example I often run through with businesses I work with: Suppose we have Company A and Company B, both in the same industry and making similar products. They each have $10 million in revenue and $1 million in profit. Company A creates its profit with $10 million in assets (machinery, accounts receivable, inventory, etc), while company B creates the same profit with only $5 million in as...

Many times through the classes I facilitate in New Orleans or through my work with Emerge Dynamics , I am asked what the drivers of a business' value are.  There are many.  However, here I describe an often overlooked, yet very important driver: Company Specific Risk. Whether my role is as a consultant or as an investor, I work closely with the companies I align myself with to identify and methodically reduce company specific risk, thereby increasing their valuation.  As described below, a company can increase its valuation by reducing Company Specific Risk, even without growing sales or profitability by one dollar.  But here's a nice perk.  When companies identify Company Specific Risk and then develop an implementation plan to reduce it, not only does that alone increase valuation, but sales and profitability usually increase as well.  A double bonus.   I was facilitating a class this week during which the students were trying to understand the d...