From an economic point of view, a company creates value when the business generates greater income than the costs of producing it, including charges for capital allocation. To create value, managers must have a thorough understanding of the performance of variables that significantly affect the value of the business which in the end is reflected in increased free cash flow.
When operating a business there are some effective ways to increase value:
Organic growth is growth in top line revenues from existing operations. Organic growth can come from increasing the capacity at existing locations, increasing the number of customers or number of transactions at existing locations, and generally selling more from your business’ current base of operations.
Efficiencies and Cost Reductions
Efficiencies and cost reductions can be considered a type of organic growth as the business is organically increasing the amount of free cash flow generated. But efficiencies can also increase sales while also driving down costs. Whereas organic growth is focused on increasing cash flow by increasing top line sales, efficiencies and cost reductions are focused on decreasing costs to increase cash flow.
New developments are a type of inorganic growth whereby a company expands into a new market or new location. These new developments are started from scratch or near scratch.New developments can be a cost-effective way to increase the value of your business. But while the overall cost may be lower than an acquisition, for example, the time required to get a new development up and running may offset the cost savings.
Acquisitions is a tried and proven way to increase your business value, especially in industries where the overall growth is muted. While often perceived as overly risky or expensive, the reality is that, when executed properly, they can be a very attractive way to increase your business value.
While each approach above has its own benefits and risks, the most successful companies in the industry actively pursue each of the above four strategies. A successful growth strategy to increase your business value requires all four, otherwise your business becomes unbalanced.
This post is based on “Four Simple Ways to Increase Your Business Value” by Brand Mewes; www.divestopedia.com