Take a Long View to Build Shareholder Value

David E. Shaeffer, Director, Audit & Accounting

To build shareholder value, companies need to concentrate on the long-term. At times, this can mean reporting earnings that are not as good as the prior year or not in line with original budget projections. Too many public companies appear to be more focused on short-term earnings than on creating real long-term value for shareholders, probably due to stock options or other bonus-related agreements for senior executives. Remember, company buyers are purchasing the future potential of the business. You sacrifice value when you overinvest in items below their cost of capital or underinvest in long-term opportunities.

Ask yourself the following questions when making an investment decision for your business:

  • Can the company afford to make the investment? Is it necessary to preserve or enhance value?
  • What long-term value would be created?
  • Are there alternatives that would create more value?

How risky is the investment? Could it be impacted by competitor decisions?  Could it become obsolete before creation of all the value? Would other variables impact the potential value?

Studies have shown that approximately 60 percent of total shareholder value is created through top line revenue growth, nearly triple the contribution of cost reduction. Many companies have achieved growth through acquisition, yet many acquisitions fail to meet their initial objectives. You need to clearly communicate expected value creation from an acquisition to the management team and measure the incremental cash flows against the original projection.

Here are three more ways to enhance shareholder value through top line revenue growth:

1. Customer Strategy:

Consider breaking  down sales into logical units such as sales territories, product/service offerings, or customer segments. For each unit, track the percentage of new customers, lost customers, and customers who have decreased, maintained, or increased their business.

2. Pricing Strategy:

Determine whether there is too much price disparity between existing customers. Upon analysis, many companies are surprised to learn that a significant percentage of their margin is generated by a few customers. There are often a number of “smaller” customers who would qualify for price increases. Create a graph with gross profit percentage on one axis and business volume on the other, and then plot each customer on the graph. You would expect to see a graph that starts high and moves lower as the volume for each customer increases. It can be eye opening to discover how many plot points do not follow this logic.

3. Proposal Process:

Understand what makes your business unique in the marketplace to quickly determine whether a prospect is “qualified.” Streamline your pricing, and then customize your proposals based on their potential size. Track the number of touch points from the date you are selected to submit a proposal until the date the proposal is accepted or rejected. We think you will find a direct correlation between the number of touch points and the success rate of the proposal. Focus on decisions that will create long-term shareholder value and make sure your management team is clearly focused on profitably growing the top line.

David E. Shaeffer can be reached at Email or 215.441.4600.

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