Growing the Value of Your Business
If you’re like most small business owners, you focus more on your Income Statement than you do your Balance Sheet. Why? Because you cover your expenses first and then consider adding to your cash reserve. You’re willing to invest in things that you believe will grow your business, such as advertising, but usually don’t put money back into the business. This approach is acceptable for businesses that are just starting out, but is too short sighted for companies that are no longer fighting for survival.
Since equity is one of the most basic measurements of the value of a business, why not establish a profit target that links to equity?
Rather than set a profit target that is a percentage of revenue, set your sights on a standard achieved by the top 5% or so of American companies: 40% Return on Equity (ROE).
By putting money back into your business every month, the value of your business will grow every year. Giving yourself a 40% ROE ensures that your company will have the capital needed to sustain your growth, and give you the cushion you’ll need to handle any mistakes along the way.