Have you been looking for ways to improve the value of your small business? Are you maximizing your return on the assets you have in your business? Using a “value framework” that was created over 60 years ago may help you identify ways to do this.
The value framework I am referring to is called the “DuPont Model,” which is a mathematical formula that breaks down the return on assets and equity in your business into three parts: revenue growth, operating margin and asset efficiency.
Revenue growth can only occur in two ways. You can either sell more (volume) or charge more (price realization). To do this, you can focus on attracting new customers, retaining existing customers or creating new revenue channels by adding new products and services.
Operating margin can be improved by reducing costs. Selling, General & Administrative (SG&A), Cost of Goods Sold (COGS) and income taxes are the best three areas to focus on.
And finally, asset efficiency is focused on your Property, Plant & Equipment (PP&E), inventory and both accounts payable and accounts receivable. Evaluating your real estate (own, lease, rent), improving inventory efficiency by increasing turns, collecting your receivables faster and taking full advantage of vendor terms are all ways to improve the efficiency of your assets.
The combination of improving revenue growth, operating margin and asset efficiency will increase the value of your small business.