Business owners and advisors understand the critical role financial reporting and analysis plays in driving the successful performance of all businesses. That said, financial metrics will never address the performance question in totality and it would be unwise to neglect non-financial considerations that influence any business.
Non-financial performance measures can provide deep insights into inner workings of your business and serve as leading indicators of future financial performance. Having a complete understanding of these factors can add another layer to financial metrics and help frame financial results.
With this in mind we’ve examined some non-financial factors that influence performance and potential valuation. Whilst not exhaustive it may provide an overview of typical non-financial factors that influence many of the SME businesses we work with.
A single director or manager rarely has the combination of skills that a management team might have. A business owner can only take a business so far – beyond a certain point they will need to rely on a wider management team if they want to keep growing and a robust management team is often the difference between failure and success.
Goal alignment, effective communication and a balancing of complimentary skill sets are the key tenants of a successful management team.
Good governance and controls are the building blocks of a shared philosophy and culture within a business. The implementation of effective corporate governance together with increased levels of accountability will enhance long-term sustainability of any business.
The most effective corporate governance frameworks match business vision with a code of rules that serves all stakeholders and addresses regulatory compliance.
Employee satisfaction and engagement
All successful business owners see their staff as one of their biggest assets. They recognise how critical it is to attract, motivate and retain highly qualified and experienced staff.
Maintaining a culture where staff are motivated and engaged can dramatically improve efficiency and boost service deliverables. A positive employee morale often leads to better attendance and higher productivity. Promoting teamwork and providing your staff with clear objectives can be the differentiator that elevates service, drives customer retention and provides the competitive advantage needed to succeed.
A key determinant of future performance for any business is centred on a simple question about staff resources – are there sufficient employees in the marketplace with the suitable skills to match the projected resource requirement to enable the company to meet its growth targets.
Understanding your customers
Successful companies are companies that are customer-focused. Providing a positive customer experience alongside a high quality product or service will create a loyal customer base and encourage repeat purchases.
Business owners need to understand their customers in detail. Examine the composition of the customer base and consider factors like retention, concentration, satisfaction levels as well as any bespoke contractual commitments underpinning key customer relationships. Critically, these factors need to be assessed in terms of the market the business operates in.
Competitive advantage is probably best understood as the factors that elevate your business beyond market rivals. In simple terms, what does the business do that’s different and can’t be easily replicated? Think about the fundamentals of the business and ask yourself what makes us better, faster, cheaper than competitors.
Digitisation and the continuous advancement of technology has fundamentally reshaped many business models. The combined effect of mobile technologies, wearable devices and sensors, cloud computing, and “Big Data” technologies will continue to further refine the structure of business models.
It’s especially important to the extent which the industry you operate in may be prone to these disruptive technologies and what impact they will have on the business model.
Current and future legislation
Not all businesses face the same regulatory constraints but at the same time, no business can be free of regulations. Current and future legislative or regulatory changes will pose different challenges for different businesses and can have a significant impact on current and performance and the future viability of the business. With that in mind any valuation appraisal should assess on a risk exposure basis the prospect of changes to the existing regulatory or legislative framework.
At Crowe our expert team has extensive experience in providing SME business owners with a full suite of advisory and compliance services. If you require assistance or are looking for professional support for your business, please contact a member of our corporate finance team.