The Capital Value Equation: What is it?
Every business owner is familiar with the standard metrics used to describe the performance of a company. Turnover and profitability are often cited as the key determinants of a company’s health; but our research shows that there’s a less-publicised measure which is even more important.
That metric is ‘capital value’ (also known as shareholder value). We believe that it is a concept that should be close to the heart of every business owner. It describes the potential value of their business on the open market, or indeed, how much it may be worth to the next generation if passed on in a succession plan.
What is Capital Value?
To set the scene, the capital value of a business is a measure of how much it is worth at any given moment. However it can mean a lot more than just this – businesses with a greater capital value are likely to have improved access to finance, be performing well against their competitors, and more likely to strengthen the value of their brand; which, in turn, can increase market share.
A recent pan-European survey conducted by Mazars found that 72% of Mid-Market and Entrepreneurial business owners believe long term capital value should be a priority for their company. However, only 23% stated that their daily activities are dictated by their efforts to enhance capital value.
For ambitious business owners, there is a huge amount that can be done to improve this vital metric on a daily basis.
The Mazars Capital Value Equation
We have termed this the Mazars Capital Value Equation:
Once all of these factors have been considered, the variance in the capital value calculated of similar sized companies, operating in similar industries, can be significant. This 'capital value gap' can run into millions over the life of a business owner: and be the difference between long-term sustainable success, and simply treading water.
In Mazars capital Value Equation - Part 1 we look at how and why the equation works, and in Mazars Capital Value Equation - Part 2 we look at how it is calculated and can be managed in your favour.
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At Mazars, our research shows that the day to day challenges of running a business often leaves little time for business owners to focus on the long term objective of growing shareholder value. We believe supporting you to sharpen your focus on the plans and tasks required to improve performance is key to achieving your long term goals.
We have a unique approach to working with our privately owned clients called Optimize that has been developed to support business owners and managers to sharpen and realign their focus on the long term business agenda.