Your Value Index

Profitability is unquestionably a key measure for any business. If you don’t make money, you don’t stay in business. But there is a larger, more important goal - to increase value. There is a direct relationship between profitability and value, but it is not the type of relationship one naturally assumes.

A company has five primary constituencies that expect and deserve to receive value:

• Shareholders
• Customers
• Employees
• Suppliers
• Community

These five constituencies are collectively known as “Value Groups.” Each Value Group has unique needs that the company should fulfill in order to deliver value to them, and delivering this value is the foundation upon which a company’s profitability is built.

Your company will have several key goals in order to become profitable (for example - penetration, sales, margin, productivity, expenses, leverage, capital expenditures, etc.). Yet, if true value is to be developed, you must also hit key goals with respect to the Value Groups. It is important to set measurable goals for each Value Group and evaluate your progress. Corporate Navigation’s Value Index ™ is an easy way to accomplish this.

The Value Index

The Value Index is a simple way to evaluate and chart your company’s progress in delivering value to each of your five Value Groups. The index allows you to quickly arrive at an overall value rating percentage.

Each quarter you rate your success at delivering value to each Value Group on a scale of 0-10. Each Value Group rating is then weighted according to your overall goals and the final score is calculated. Look at the following charts to see how this works.

Example

In this example, the company weights each Value Group at 20% of the total and the quarterly score is a respectable 88%. The key is to arrive at important, measurable goals for each group to be delivered on a quarterly basis.

(We know this is long, but stay with us. Words are really important and there are some cool graphics coming up too).

Another Value Index example

A hypothetical company (company A) set deliverables by Value Group and then graded itself at the end of the quarter. It weights each group equally, at 20% of the total.

The company delivered to its shareholders by hitting all of its financial goals which resulted in a 100% Shareholder grade. Unfortunately, they received higher than normal customer complaints because of a poor company policy. Although this didn’t affect cash flow, it resulted in a 50% Customer grade. The company also missed an important deadline for delivering a promised and much anticipated company newsletter, which results in a 30% Employee grade.

The company did well with timely supplier payments, but they didn’t announce a system changeover, which surprised vendors and resulted in a 60% Supplier grade. Finally, the company donated $50 to charity but didn’t rally for a special cause that would have demonstrated their stated commitment to “give back to the community.” This resulted in an anemic 20% Community grade.

Company A's Value Index looks like the following:

Company A's Value Index

The final result for the quarter? F, or 52%.

Why does this poor Value Index matter?

Consider that company A and a rival company B offer the same goods and services and generate the same cash flow, and they both decide to offer themselves for sale at the same price. A prospective buyer conducts due diligence in a meaningful way and finds that company B has loyal customers and employees, suppliers that are willing to go the extra mile when necessary, and local civic and governmental entities rave about what the company has done for the community.

Company A, on the other hand, has customers that are just satisfied enough to stay with the company’s product or service, and its employees are just there for the check and not much else. Suppliers complain about being stretched on being paid, and the company has participated in the community nominally, if at all.

Now both companies generate the same cash flow, but company B will sell first and most likely will command a Value Premium. Company B navigates by delivering value to the Value Groups and consequently remains highly focused on goals that are practical and relevant to the company’s success.

A solid foundation

You can think about the Value Index as a foundation. Delivering value to each of your Value Groups is part of building a strong foundation. On top of this foundation sits your company’s business. If the foundation is solid, it is easier to build a sturdy business. The stronger and thicker you make your foundation (i.e. high ratings in each of the five groups) the bigger and more stable you can make the business on top of it (i.e. larger sales, more people, etc.)

A solid foundation

A weak foundation

If you do not deliver value to each of your Value Groups, it is like building on a weak foundation. Eventually the foundation will crumble and the business will come falling down. A business with a poor Value Index needs immediate attention.

A weak foundation

So what?

Survival then success. In that order.

We are very passionate about this subject and believe our Value Index is a stunningly simple navigational tool that can power your ship through all kinds of waters.

You strive for long-term viability, fulfilling dreams for everyone associated with your efforts and generally building something truly special. You want to succeed. You want to do more than survive.

And this is done by determining who depends on you, what they need from you, and how you will organize yourself to deliver the goods to them.

We need to talk about this. Call us at 830.626.7015 or email us right now.