How to Create Business Value: A Practical Guide for SMB Leaders
Two businesses can turn over the same money in the same year and be worth entirely different amounts, and the reason usually has very little to do with the year in question. Business value is a measure of what a company will be able to produce in the years ahead, which means it is built out of three things:
- customers who keep buying and will accept a fair price
- capability that sits in the organisation and not in a handful of people's heads
- cash that comes back in quickly enough to pay for the next stage of growth without borrowing
Whether those three improve over the next three years is decided inside the leadership team, not in the market and not by the budget.
Why a busy year and a valuable year are not the same thing
A busy year and a valuable year are not the same thing, and plenty of SMBs have several of the first before they ever get one of the second.
Ask an owner-manager how the year went and you might get a lowdown like this - client numbers wavering, recruitment taking an age, rolling out new software that ate a whole quarter and most of the finance director's goodwill. All of it real, all of it demanding, and quite a lot of it leaving the business roughly where it stood in January.
You can work extremely hard for twelve months, hold the numbers, keep everybody employed and still arrive in December with a company no better equipped than the one you started with. Effort is not the problem here and neither is commercial instinct. Urgent work arrives with a deadline attached, a real person following up on it and an obvious cost if you let it slide, whereas the work that actually builds the business has none of those three and therefore goes into the diary for a week that looks less busy...where it waits until that week fills up too.
Where does business value come from?
Value in a small-medium business (SMB) is created in three areas, and it is unusual to find a company paying real attention to all three at the same time.
Your position with customers. A business that solves a problem its customers cannot easily solve elsewhere can hold its prices and keep its clients, and that combination of pricing power and retention will do more for what the company is worth than almost any efficiency programme you could run alongside it. The test is uncomfortably simple. Could you raise your prices by five per cent tomorrow and lose nobody? If you could, most of that five per cent falls straight through to profit, and it does so again in every year you hold it, which is more or less the definition of a valuable position.
Organisational capability. This is the least glamorous of the three and by some distance the most neglected. Nearly every SMB has a version of the same problem: the founder who knows why one particular customer has always been handled differently; or the sales director whose contacts book is effectively the pipeline; or the operations manager who can price a difficult job in ten minutes because she has priced four hundred of them. That knowledge is real and it is worth money, but while it lives in three people's heads the business does not own it. Value accumulates at the point where that knowledge moves out of individual memory and into trained people, documented ways of working and
systems that carry it forward when somebody hands in their notice.
Cash. Growth costs money before it earns any. You pay staff, buy materials and deliver the work weeks or months before the customer's payment lands, and that gap has to be funded from somewhere. A business that funds it out of its own trading is worth considerably more than one funding it on an overdraft or an invoice finance facility, because borrowing gets dearer every time you go back for more and it gives somebody outside the company a say in what you do next. Which of those two businesses you are comes down to three dull questions: how quickly your customers actually pay, how long finished work sits unbilled and what payment terms you have agreed at both ends. Tighten those and last quarter's sales will fund next quarter's growth, whereas leaving them alone is how a good year turns into a cashflow problem.
How does leadership create business value?
Leadership creates business value by removing itself as the bottleneck, which sounds obvious written down but turns out to be one of the harder things a senior team ever does.
In most SMBs the real constraint on value creation is the senior leadership team (SLT), and specifically the number of decisions that cannot be taken without it. Every judgement routed back upwards sets a ceiling on how quickly the business can respond, how fast it learns and how much more work it can absorb, and that ceiling gets lower as the company grows.
Loosening it asks for three things that can all feel considerably worse than doing the work yourself: giving people the context behind a decision and not only the task, accepting a decision that is sound without being the one you would have made, and living through the first few imperfect outcomes while your team's judgement catches up. The third is where most leaders reach back in and take the decision off the table, usually for reasons that sound entirely sensible at the time.
Family businesses can often find this hardest of all, for reasons that are not really operational. When the founder's name is on the building, they believe that stepping back from decisions can read as stepping back from the thing itself.
This is why we treat leadership development as a growth strategy and not a training cost. A capable leadership team is one of the very few assets that changes what a company is worth without ever appearing on its balance sheet.
What is good growth, and why does it protect value?
Good growth is growth that leaves the organisation stronger and not simply larger, and it protects value because the alternative erodes it while the top line is still going up.
Growth that burns cash faster than it returns it, or that wins work at margins which never recover, or that stretches a culture past the point it can absorb, will flatter the numbers while making the company weaker and more fragile than it was before any of it started.
Good Growth is the deliberate kind: it knows which customers it wants and turns down the ones it does not, it builds capability slightly ahead of demand rather than permanently behind it, and it leaves the organisation, its communities and the planet in better shape than it found them. We care about the subject enough that our CEO and one of our Masterclass speakers have written a book about it, Realising Good Growth by Kempster and Barnes.
For B Corps and purpose-led businesses the commercial case and the values case turn out to be the same case. Retention protects knowledge, strong supplier relationships protect resilience, and the measurement discipline that certification demands is the same discipline that keeps growth manageable.
How do you start creating business value?
Start by picking one problem your business solves badly and often. Choose the one that comes up most, not the one that looks largest, since a fix only makes a big difference if the problem keeps recurring. Then repair the system that produces it (the process or the procedure) and not the thing-to-do in front of you this afternoon. Then, and this is the part that reliably gets skipped, hand ownership of that system to somebody who is not you.
Do that regularly and you will be running a noticeably different business twelve months from now.
FAQ section
What does creating business value mean? Creating business value means increasing what a business can produce in the future rather than only what it produced this year. It comes from customers who keep buying and accept a fair price, capability held in the organisation rather than in a few people's heads and a cash cycle that funds growth rather than constraining it.
Where does business value come from in a small-medium business (SMB)? Value in an SMB is created in three areas: position with customers, which shows up as pricing power and retention; organisational capability, which is knowledge held in trained people and documented ways of working; and cash, where growth that funds itself is worth more than growth that has to be financed.
How does leadership create business value? In most SMBs the main constraint on value creation is the number of decisions that cannot be made without the senior leadership team (SLT), because each one sets a ceiling on how quickly the business can respond and take on more. Leaders create value by giving their teams the context behind decisions, accepting sound choices that differ from their own and developing teams capable of running the business without them.
What is good growth? Good growth is deliberate growth that leaves the organisation stronger rather than merely larger. It selects the customers it wants, builds capability slightly ahead of demand rather than behind it and funds itself knowingly instead of burning cash faster than it returns it.
How do you start creating business value? Choose one problem the business solves badly and repeatedly, then fix the system that produces it, the process or the procedure, rather than the individual instance, and hand ownership of that system to someone other than yourself. Repeated regularly, this changes what the business is capable of within a year.
Creating value in a business is rarely the result of a single decision. It comes from leaders who keep making the sort of choices that leave the organisation more capable than they found it, quarter after quarter, for years at a time. That is the work we do with owner managers, CEOs, MDs, directors and senior leaders on LEAD™. Our next programme begins on 5th and 6th November. Contact us here to find out more or reserve a place.
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