Understanding Your Business's True Value - It's What You Keep That Matters

There is a crucial concept that every entrepreneur should understand:

"It's not what a business makes, it's what it keeps that matters."

This idea is at the heart of running a successful business and preparing it for a bright future, whether you're thinking of selling or just want to boost its value.

Let's break down some key terms you might see on financial statements and explain how they fit into the big picture of your business's health and value.

1. Net Sales

Think of net sales as the total amount of money your business brings in from selling products or services, after subtracting returns, allowances for damaged goods, and discounts. It's like your business's total paycheck before any deductions.

2. Cost of Goods Sold (COGS)

COGS is the money your business spends to make your products or buy the goods you sell. Imagine it as the cost of ingredients for a chef. It includes things like materials and direct labor. Subtracting COGS from Net Sales gives us the next important term.

3. Gross Profit

Gross profit is what your business keeps after paying for the 'ingredients' (COGS) but before paying all the other bills. It's like knowing how much money you have left after buying all the ingredients for a big dinner party, but before you've paid for the decorations, invitations, and entertainment.

4. Expenses

These are the costs not directly tied to making your product or service. They include rent, utilities, marketing, insurance, and salaries for employees not directly involved in production. It's the cost of running your business day-to-day outside of producing what you sell.

5. EBITDA - Earnings Before Interest, Taxes, Depreciation, and Amortization

This is a fancy way of saying, "Here's what our business makes before we pay for some big-picture items." EBITDA gives you and potential buyers a clearer view of your business's operating performance by removing some costs that can vary a lot from one business to another.

6. Seller's Discretionary Earnings (SDE)

SDE is a key number for small business owners. It adds back certain expenses to your business's net profit, including your salary and benefits, any non-recurring expenses (one-time costs), and other personal expenses run through the business. It shows the total economic benefit to an owner, making it super important for valuing small businesses.

Why It Matters

Understanding these terms helps you see not just how much money is coming in, but more importantly, how much is left over after covering all the costs of running your business. This leftover money, or profit, is what truly adds value to your business. It's what you can use to grow, save, invest back into the business, or even pay yourself.

To increase the value of your business, focus on:

- Boosting Net Sales: More sales mean more gross profit, but only if you manage COGS and expenses well.

- Controlling COGS and Expenses: Find ways to reduce costs without sacrificing quality. Every dollar saved here drops straight to your bottom line.

- Understanding EBITDA and SDE: These figures give you and potential buyers a clear picture of your business's true earning power.

Remember, it's not just about making money; it's about keeping it. That's what builds a valuable business. By focusing on these key financial metrics, you can make informed decisions that drive your business forward, increase its value, and prepare it for whatever the future holds.

If you have questions about improving your business's value or anything else, feel free to reach out. Here's to your success!