When growing a business
Deep financial analysis can provide information on the most appropriate growth rate for a business, the actions required to achieve that growth rate, the capital requirements for the targeted growth rate and some of the risks of going after firm growth.
When raising capital
Financial analysis gives confidence and reassurance to investors and in so doing helps an entrepreneur attract strong investors.
When selling a business
Insightful financial analysis helps show a seller what they need to do to most effectively achieve the price they want and it provides a baseline for negotiating the sale of a business.
When buying a business
Financial analysis reduces risk by showing how a business is performing, its potential to go under, and what the new owner must do to maximise returns. It also provides the tools for a buyer to put a price on a business.
Who should care about financial insights?
Although it’s pretty obvious that managers and business owners should be highly concerned about properly collecting and interpreting financial data from their business, there are others who can benefit immensely from having better insight into how the finances of a business work.
For example, resource providers and consultants can be more effective in their jobs if they can properly analyse financial data.
As such, consultants and resource providers can develop a competitive advantage by collecting or accessing benchmarking information, setting up templates or systems to quickly analyse clients’ financial data and translating those findings into meaningful action.
While some advisors may try to do this on their own by applying the principles laid out here to set up a proprietary system, others have already recognised the value in using a tool such as ValuationUp.
“ValuationUp.com is Bain/McKinsey in a box,”said Pavlo Phitidis, CEO of Aurik Business Incubator, while Evan Rice of consulting firm Spinnaker Growth Partners said that ValuationUp is “super useful to us in showing clients what they need to do.”
Ultimately we all want stronger, more competitive businesses. Business owners want to maximise the potential of their business. Consultants want to give their clients the best possible advice to make their businesses stronger; resource providers want to invest in viable businesses that will provide a return.
Government officials want strong growing businesses as the backbone to the economy.
Where did the idea for ValuationUp come from?
Ochse reports: “My career at Bain taught me how to fix the issues that big companies faced. My finance knowledge taught me how to quantify the value of these projects in terms of their effect on the value of the business.
“Over time I consulted to many smaller businesses and ran strategy workshops for some bigger ones. It was quite obvious to me that businesses tended to focus mainly on sales and sales growth.
Very rarely did they consider taking on the easier (but less glamorous) projects that would do more for their company’s valuation.
“I came to realise that this was because they didn’t understand the impact or relative priority of these projects and that in turn was because they had no clear idea of whether they were over or under-performing in these areas.
“Over the last few years I had a number of clients ask me to help them understand finance, so I ran a course called ’Finance 4 Entrepreneurs.’ It was very successful but entrepreneurs didn’t use the Excel model we gave out.
“I followed up and realised that most entrepreneurs are scared of Excel; they were scared of breaking something they could not fix so they didn’t use it. At that moment I decided we had to do something in a more familiar interface – the browser.
“It had to be a black box, and it had to tell entrepreneurs exactly what they needed to do. Kenneth and I decided to shift our priorities almost entirely from our other business to this new one. It’s been flat out ever since.”