At the highest level, business value is simple. The formula is:
Business value = Forecast Future Cash Flow / Risk
In business valuation risk is the likelihood of achieving the forecasted cash flow in the future.
Risks come from many angles and chip away at profitability and value.
Here are a few risks, but certainly not all risks:
Payment Risk – Many businesses extend large amounts of credit and don’t always monitor changes in client credit risk over time. Manage accounts receivable and be careful with credit.
Interest Rate Risk – Everyone remembers this one now!
Liquidity Risk – Cash is like blood to your body. Even a profitable business can run out of cash. Manage cash daily or weekly depending on your balances.
Market Risk – It has been a good economy, so long leaders are forgetting about what a recession is really like. If you are in a cyclical industry review plans for when the party stops and sales drop by 20%, 40% or whatever happens in your industry.
Regulatory Risk – This can be a wildcard for many businesses and often understated until a problem arises.
Supply Chain Risk and HR Risk – These both were under-appreciated until Covid. Do you have alternatives if your key people leave, or primary supplier has problems?
Emerging Risks – It’s your guess about what is next. Review and do your best to get it right.
Appropriate risks should be reviewed and systems implemented at each level of your organization. For instance, in construction, weekly safety talks are given by many companies. These are most successful when the conversation goes two ways. Often staff will understand their day-to-day problems and risks better than management.