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FINANCE FOR THE NON-FINANCIAL
BUSINESS VALUE:
Breakthrough Leadership and Human Resource Management

Creating ‘good to great’ business value and ‘breakthrough growth’ in price earnings ratios, requires significant leadership and human resource management. It requires living in the creative tension between future vision and current reality. It also requires a clear understanding, as well as the intentional implementation, of basic business fundamentals in a number of areas.
In this article we will look at certain key fundamentals relating to BUSINESS VALUATION. After doing Chartered Business Valuation and CFA courses as well as with over twenty years in merger/acquisition, breakthrough growth and good to great business experience as a Chief Financial Officer, I have discovered the need to understand and apply critical fundamentals in key areas.
BUSINESS VALUATION is grounded in the basic understanding and application of key fundamentals and a key Business Valuation measurement is based on price and earnings as well as earning per share and capitalization rates.
CAPITALIZATION RATE is the required rate of return (%) that is used to convert income/cash flow into value. The inverse of the capitalization rate is called a multiple. It is the divisor used to convert a constant earnings or cash flow to a capital amount.
The essential factors in determining the capitalization rate are the following:

a)Confidence in the “Quality of Earnings”
b)Risk of the business
c)Growth in Earnings
d)Risk free rate of return in the market
e)Liquidity of the shares/interest
f)Tax rate and impact on earnings
g)Inflation rate
h)Leverage and ‘weighted cost of capital’
i)Tangible Asset Backing
j)Comparable market prices earnings raios (P/E)

These represent a fairly long list of factors that impact the business valuation and each of these will be discussed in future artices.
For example, confidence in earnings requires a consideration of historical trends and patterns; recognizing that risk is measured by standard deviation of variations. In other words, it is important to show consistency in earnings. Another factor relating to the nature of earnings is the operating leverage or fixed costs and breakeven levels. This may require an understanding on the gross profit margin and effects of net income on changes in revenue. In doing the valuation business analysis, various sensitivity analysis is important such as exchange rates, costs of major cost inputs, sales mix and price variations.
Business risk is another important area for analysis. In our next article we will look at these and other related business valuation and analysis considerations.