Can you really add $100,000 in enterprise value to your company in just five minutes? At Cunningham & Associates, we think so.
Too often, we’re involved in budget discussions with clients that go something like this:
“We can’t cut that part of the budget. A $5,000 decrease isn’t worth the headache of telling our manager they have less to work with.”
Sure, looking at this cut from only one perspective may seem insignificant. But what happens to enterprise value?
Cutting expenses and the impact on enterprise value
When we cut expenses, there’s a dollar-for-dollar increase to net income and cash flow to ownership.
Let’s look at that $5,000 example again:
Many small to medium-sized businesses trade somewhere in the 5X EBITDA range. This simple $5,000 cut is now adding $25,000 in enterprise value. Suddenly, that perceived “difficult” conversation that wasn’t worth your time for $5,000 is now worth $25,000.
Moving that thought forward, if we can identify three additional line items with $5,000 in cuts, we’ve now shed $20,000 in total expenses from our budget. Couple that with the right management systems and controls to ensure we hit our budget, and you’ve just created $100,000 in additional enterprise value in just five minutes.
Ok, ok — you may not be able to make $1.2mm per hour (unless you’re Floyd Mayweather). But I think we can all agree there’s significant power in taking a hard look during your budgeting process and identifying what you can adjust.
Moreover, even minor cuts of $5,000 can have significant power when you stack them together and multiply them by your industry multiple.
Budgeting to Increase Enterprise Value: Small Changes, Big Differences
You may also find that when you challenge your team to make changes and implement the proper system to track and control processes, they may come in significantly below the budgeted decrease!
The system implemented should challenge your team to consider (and reconsider) the necessity of certain expense items while striving to find more cost-effective solutions.
A helpful tool in holding these conversations with your team is to show them the best performance for each line item you’re looking to adjust over the last few fiscal years.
For example, if your Shop Supplies has seen expenses of $48,000, $39,000, and $51,000 over the last 3-years, respectively, show your manager that you could operate successfully at a $39,000 level just two years ago. This will mitigate many potential excuses or barriers to why this is too difficult.
Enterprise Value and Budgeting: Key takeaway
Before reading this blog, shedding $5,000 from an expense line item while budgeting may hardly seem worth it. But remember to consider the bigger picture and the enterprise value you can create through the budgeting process.
Happy Budgeting, and we’d love to hear about your $1.2MM hourly rate!
Contact us today for a free consultation on how our Growth to Goal Model can increase your enterprise value.