Increase your Company Value with an EBITDA Transformation
By Thomas Sobell, Managing Director at Next Stage Solutions, Inc. | firstname.lastname@example.org
As CEO, you are charged with driving the value of your company. Public companies are measured by the market capitalization, however, both public and private companies are measured by their Enterprise value. How do you best optimize the value of your business? Increase your Cash Returns through an EBITDA (earnings before interest, taxes, depreciation and amortization) transformation.
This may result from developing new products, technologies or acquiring companies under the current portfolio.
Alternatively, look within the company and seek out “speed bumps” or bottle necks that hinder your organization from delivering, fast, efficient products to the market you serve. See if there are common issues that span the entire organization that can be fixed by bringing key individuals together to problem solve. As CEO, you are in the unique position to see the holistic vision of the company.
Look for commonalities in business problems, across all functional areas.. What are your finance people saying and compare those sentiments with operations, human resources, sales and marketing. Likely your managers are saying they depend on another function of the company to achieve their objectives and resolve their issues. That is a starting point for discussions with multiple departments working together on solving problems with department objectives aligned by cooperate goals.
From that point, you want to develop measurement tools that all can agree on and adhere to. A measurement feedback system is a guidepost for management to work more effectively. Maximize the revenue inflow of cash and supply your customers with the appropriate mix of services and products. Focus on efficient allocation of costs to generate optimal customer satisfaction. That minimizes the overall cost of production. Put the two together, and more cash is generated from both the top and bottom lines. All the while the customer is happy and employees inside the company no longer point fingers saying,
Your Roadmap to a Successful Transformation:
- Bring your senior staff together, cross functionally. Ask what they think are the key impediments to higher productivity.
- Which suggestions, if implemented, are measurable – a before and after?
- Separate those suggestions that directly impact cash flows from indirect measures of productivity, efficiencies and profit.
- Focus on solutions that produce an incremental positive cash flow.
Here is how we supported one of our clients using this method.
- Financial people say sales and growth are leveling off
- Everyone should work harder to get similar returns on sales.
- Sales and marketing can book the sales, but are not sure which kind of sales are the most or least profitable.
- Operations continues to fill orders and makes the customer happy, but they don’t have a feedback mechanism to tell them if the mix of people and products sent to the customer are optimal.
- The customer is happy, but how did it affect profits?
Across the company, the common words were
IF ONLY ….
Bringing the executive team and the managers together, we implemented a Job Costing System. We measured, at the job level, all the input factors; labor and materials, and both direct and in-direct. Our client already had an ERP system, but had a few missing loops that needed to be tied to the overall system to capture truly all direct and indirect costs on all customer profiles. This was achievable by activating an additional tool already available, but not used, and by purchasing and implementing an automated expense management tool.
Management had a greater understanding each month of jobs produced with the best returns. Pricing was no longer done according to “gut feel”. This new system produced measureable gross margin results immediately after job completion:
- Pricing schemes can now be altered for subsequent similar jobs.
- Costs were reduced, as management refocused their skills sets to seek optimal resource allocations between large complex jobs and smaller repetitive ones.
- Management implemented a new bonus plan that incentivized teams and individuals minimizing the costs of labor and materials for each quoted job.
- Sales and marketing now have a means to determine more appropriate pricing schemes.
- Marketing now has the tools to tell which general markets produce the best returns.
The example above resulted in an immediate EBITDA net gain short term. The longer term affects will be gained by understanding better the market opportunities and the profit margins of each service offerings to customers. It also provides sales with the services segments the client wanted to focus on to meet its corporate goals.
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