Can You Value Something You Don't Understand?

We work with three types of customers to support them to be successful:

-?????????Those who want to create a valuable ‘stand-alone’ asset – most SME owners get stuck in nothing more than creating a job for themselves (albeit a great job, but a job all the same) but you make different decisions if you want to create and grow something that can live without you and that someone else will 'value' enough to pay for

-?????????Those wanting to grow at a faster value rate than their competitors - ‘value’ has a different definition for everyone. For some, value is top-line growth, for some it's profit, but understanding the metrics by which your industry, and therefore your organisation, is 'valued' is imperative

-?????????Those wanting to sell at some point – this is a choice but if you’ve ticked off the first two points above, this becomes a very real, very value-based option that you can consider (you don’t have to take it, of course). It gives you options, and in life, options are everything

A heated, but valuable, exchange with a new customer of ours recently got me thinking:

Can you value something you don’t understand?

It was in the context of valuing the finance function in a business and the value it can and should be delivering. But what comes first – a decision-makers belief that ‘Finance’ and the people who deliver these roles have little value OR people in ‘Finance’ delivering the value that’s possible and then converting the non-believers?

One way to see the light is to go through a very simple exercise called PURE (credit and thanks go to Derek Morin and John Warrillow for sharing this nugget of wisdom in John's brilliant podcast here).

Since most owners and investors determine value based on a multiple of EBITDA, every dollar that drops out of the bottom of a business after expenses now, matters later. The PURE model looks at classifying your Overheads line-by-line and attributing one of the four letters (P-U-R-E) against it to help clarify the value each expense is delivering, and using this to determine what happens to this expense the following month. To spend or not to spend. That is the question.

Having just gone through this exercise with three customers and on our own P&L, the insights it delivers are pure (pun intended) genius.

• P is for Plus – something you want more of - usually a driver of Profit - but not always. This can be a cost profit-enhancer, expense-rationaliser or risk minimiser, but ultimately this is a 'spend' that you know you can't live without (well, for this month at least)
• U is for Unnecessary – something you want less of. This forces you to ask the question: what does this expense really contribute to the bigger picture?
• R is for Replace – a cost, role or action that has a more efficient or cost-effective alternative. This gets rid of the 'but we've always done it like this' line that drives me mental
• E is for Equal – something that needs to remain the following month but that you'll review again. This stops things just sitting there for months on end, unchallenged (also see above)

So to celebrate the new Calendar Year, try this exercise, or call us and we'll walk you through it as an external voice of reason (and hold your feet to the fire by asking 'why?').

Back to the original question...

Can someone value something they don’t understand?