Assessing Company Value

When individuals are interested in purchasing, investing or working with a company it may also be a good idea to assess it’s financial status, using public information available through government sources, two documents can allow proper assessment. A statement of comprehensive income and a statement of financial position.

Company value calculations

Statement of comprehensive income

A statement of comprehensive income is a usually detailed report listing the inflows and outflows of capital of a business. They often include exceptional expenses and net profit for a business and subsequently can be difficult to follow but should provide a good understanding on how a business functions through the financial year.

Statement of financial position

A statement of financial position outlines the inventories, assets and equity a business has at the end of a year or season. It may also help to identify where most of a businesses cash is being spent or held in assets.

What are the benefits of these documents?

A statement of comprehensive income will help to identify the basic operations of a business, for example the yearly turnover. A company that makes more turnover than another, however may not be financially better or worse however as it can depend on how the money is used, fortunately there are many equations that can help us to define a standard for these figures that we can use to compare between businesses or yearly statistics.

Gross Profits

Gross profits allow us to determine how much profit a company makes after selling it’s products, this is already better than revenue as it shows that a company may be making a lot of revenue, but may be spending it all on sales. It is usually defined in the statement of comprehensive income.

Gross profit is Sales Revenue – Cost of Sales.

This figure is useful, but can be more effective when coupled with a percentage, as it is would allow us to compare for example previous years income, as below, it is for this reason we use the Gross Profit Margin to calculate a percentage.

Gross Profit Margin is (Sales Revenue – Cost of Sales) ÷ Sales Revenue. Higher is better.

BusinessGross ProfitGross Profit Margin
XYZ Telecoms$470,00051.32%
AB Telecom$460,00079.92%
AT TEL$430,00030.10%

As you can see from above the company XYZ Telecoms makes more money than AB Telecom however it is much more inefficient in it’s spending and therefore could reduce the cost of it’s sales to get higher returns. Note that although AB Telecom makes a higher Gross Profit Margin it does not make more money. Here is a breakdown of another Telecom company Telecomatic and they spend roughly 40% of their Revenue on sales, and therefore have a gross profit margin of 60%. In other words, if 40% is spent on sales, the company keeps the other 60% barring any other costs, like fixed costs.

RevenueCost of SalesGross ProfitGross Profit Margin
$100,000$40,000$60,00060%

Using gross profit and the gross profit margin is advantageous because it;

  • Enables you to calculate if spending on sales is too great.
  • Identify which company is better at sales spending.
  • Enables to identify if year on year a businesses spending on sales has been successful or not.
  • If there are two company chains, in two different locations with similar sales revenue, if they were to use different methods of advertising the sales profit margin would allow you to determine the best method based on the higher percentage.

However it does not;

  • Account for exceptional items or income.
  • Account for Fixed costs, such as machinery rent or leasing.

Operating Profits

Operating Profits are the next step of a businesses true income, operating profit accounts for overheads (expenses) that a business has to pay in order to function, expenses like factory ownership or employee pay and should easily be very close to a businesses true profit for the year if the business is new or homogeneous in nature. Operating profits however do not account for or should not account for;

  • Exceptional expenses, like purchasing new facilities or machinery.
  • Assets a business may hold of value.
  • Creditors.
  • Financial income or company dividend.

Operating Profit is calculated by Gross Profit – Overheads. Operating Profit Margin is calculated by (Operating Profit) ÷ Sales Revenue.

Yell TellThis year
Sales Revenue$848,100
Sales Expenditure$298,100
Gross Profit$550,000
Gross Profit Margin54.20%
Expenses$130,000
Operating Profit$420,000
Operating Profit Margin28.30%

Net Profit Margin

Lastly, for the comprehensive income sheet, the Net Profit Margin will show the overall effectiveness of the businesses expenditure. And represents how much raw profit a company makes based off its revenue, to put this into perspective its how much money is profit when multiplied by the turnover, so if a company’s net profit margin is 17%, and they turnover $1m a year, the company will have $170,000 unconditional capital left over at the end of the year barring complications.

The Net Profit Margin is calculated by Profit for the year ÷ Sales Revenue.

Market Research

When conducting market research businesses need to take risks and may be uncertain on the performance of those risks, however market research allows businesses to minimize the risk.

Market research in a dynamic market can be difficult as it can be hard to gauge what is an acceptable metric and one that will not change or become inaccurate. Businesses invest thousands in trying to calculate what the next big trend will be and even more in advertising.

  • Selling Products is the ultimate goal for market research, however it may allow a business to better define its product for market
  • Dynamic markets can provide access points for rapidly growing start-ups
  • Markets can be dominated by Oligopolies, Monopolies or have low demand, which can mean that a business will struggle to set-up there
  • Market research could be very expensive for a business and it has many pitfalls and benefits

There are a number of techniques that businesses can use to identify if they should set-up a business.

  • Competitor Analysis, anything that allows a business to know what the otherbusiness competing are up to is competitior analysis.
  • Crime Levels, Crime can ruin a business so it is important that a business is in a safe loaction, a jewlers in a poor area won’t do very well.
  • Average Wage, wages could contribute to the staffing levels available for the businesses.
  • Footfall, people who walk past the business.
  • Client Need, Some business may setup new premisises as a client has created a demand.
  • Overhead, a rented building with too high overhead may not be viable as a solution.
  • Start-up Cost, some businesses cannot create a start-up without initial funding, especially if their project has great risk.
  • Population/Target Market, local area business may not be able to set-up a business because the demand is so low.
  • Public Opinion, some people may not like the idea of a business setting up in a particular area.
  • Local Economy, the local area may not be affluent enough.
  • Building Space, some business premises may not be large enough.

Some Market Research Techniques

Businesses can use multiple techniques to find out these aspects, such as:

  • Internet
  • Survey
  • Observation
  • Landlord Conversation
  • Questionnaire

market research creative study

Market research does have limitations,

  • You cannot constantly keep asking the same customers
  • You cannot ask some questions
  • Data could be inaccurate
  • It is expensive
  • It is not always your own data
  • It product idea could be stolen
  • The market could be fast changing
  • There could be leading questions or biased interviews when asking individuals

 

 

What actually is Marketing?

Marketing is Anticipating, and satisfying, customers wants and needs, efficiency and profitability, Marketing includes

  • Market Research
  • The Marketing Mix

What is the purpose of Marketing?

  • To make profit, essentially by improving sales
  • To remind the customer of your product through promotion
  • To see what the customer wants by offering their product
  • To link the product to the brand and create a brand association
  • To communicate and offer competition to other businesses (to compete)

There are two types of business orientations, Business to Business where businesses sell products to other businesses, such as tools, office equipment and building supplies. Business to Customer is more noticeable to individuals as it is more prominent and most common.

Marketing begins by setting a goal or objective that defines what the company wants to achieve, and when it hopes to reach these goals.

They then create a marketing strategy, to outline how they will bring in what they wanted to reach their objective.

the four ps of marketing product price place and promotion marketing mix

What defines a Market?

A market is anywhere that brings together buyers and sellers with a view of exchanging goods and services. The location can be physical, national global, physical or electronic.

A niche market is a small or select group of a larger market. Niche markets generally have a smaller cohort of customers interested in the product, however some businesses sell their products at a high price to compensate for lost sales.

Market size is the total volume or value of all sales of a particular group of products. Market growth is the percentage change in market size over a period of time. Market share is the percentage of the market achieved by one firm, or brand, or product.

Markets can be dynamic, which means they change quickly or stable, where any change is fairly small. Dynamic markets are becoming more and more common as technology advances to new greats, incorporating new techniques mean a business can become obsolete.

How Customers Associate Quality with a Brand

brand qualityWithin any business there are multiple factors that a customer can imprint on to recognise a brand and associate with quality. Businesses can use the customers intuition to their advantage, targeting on the key aspects of a quality product in order to maximise return. Here is a list of the common points a business can tailor in order to maximise their revenue;

 

trusty tea co allows product association quality brand reputation

  • Profitability, Businesses must decide how much profit each product or service should undertake, whether it be a large return or a small one. Customers may be willing to buy a product purely on its premium price point.
  • Customer Service, Businesses may wish to place the quality of their product on par with the quality of its customer service. Poor customer service could reflect badly on a quality product and vice versa.
  • Competitiveness, Businesses may wish to use pricing in order to undercut the cost of its competitors. Businesses may also want to take on new locations and footfall in order to maximise profitability.
  • Supply Chain, Business may cut costs and use cheaper suppliers, however unethical or environmental considerations could be overlooked and come back to haunt businesses later.
  • Reliability, A product that is unreliable or prone to failure may mean that customers look elsewhere for new products, defined obsolescence could damage the perceived quality of the product as well, If it were to fail after a certain time because of a weak part, customers may feel frustrated having to buy new ones.
  • Brand Image, For some customers a brand could be vital to what product they purchase, If a brand is damaged, it could affect the sales of businesses massively. Some businesses may also struggle to maintain a positive reputation if the business specialises in cheap services, such as transport or hotels and may not be too affected by bad publicity as the cheap price point means the demand for the product does not change (it is inelastic).
  • Quality Control could also mean that products are of a constant high quality and should in tern allow a business to work effectively on producing high quality products for the consumer, who will hopefully repeat purchase. Kaizen and Total Quality Management can allow a business to excel at creating a quality product that is lean and high quality as it forces the product to be a standard that the business expects and what the customer wants.
  • Brand Awareness, A customer who does not know a product exist may not buy it, additionally any customer who recognises a product may choose to buy it over a generic product because of it. Advertising and promotion can artificially create the connection between the customer and the brand of trust and safety in a product, that this is the product they should buy.