The world of business valuation can be a confusing and intricate web of multiple factors and considerations. Yet, along with business finance, business valuations are one of the most crucial indications of a business’s success.
Understanding the importance of both business finance and valuations, and the impact of the former on the later can be very helpful in making strategic decisions regarding both daily operations and even long-term growth. In this article, we’ll introduce you to the symbiotic relationship between business valuations and finance.
What is a Business Valuation?
Essentially, a business valuation is the process of determining the economic worth or ‘value’ of a company. There can be many reasons why a valuation is sought. It could be to secure loans, or other forms of business finance, or to attract investment, acquisitions or mergers.
What goes into a Business Valuation?
A valuation takes into account many different factors. These can include a company’s financial statements, market trends, overall performance and growth, and even managerial structures.
Why is a Business Valuation important?
Knowing the value of a business allows stakeholders to understand the health (financially, at least) of a business and to then extrapolate or calculate the potential. It can also be used internally to help the executive management team to make informed, strategic and effective decisions.
What is Business Finance?
The term “business finance” can and is used in a variety of ways but at its most fundamental level it refers to the funding a business needs for its commercial purposes.
All businesses need capital to start, run or grow, and without strong business finance foundations in place, success can be near impossible.
More broadly, business finance can be used to refer to the management and allocation of financial resources within a company or organisation. This can involve anything and everything from investment decisions to capital structure, and budgeting to access to lines of credit.
The better optimised, structured and accessible business finance is, the greater the ‘lifeblood’ of the business in operating and growing.
The Impact of Business Finance on Business Valuation
How does business finance affect a business valuation?
Business finance and valuations are intricately connected. They impact each other in key ways.
1. Financial Health
The financial health of a business is often reflected in its statements and ratios, which can then either increase or decrease the valuation of a business.
2. Liquidity and Profitability
Liquidity and profitability indicate the accessibility of capital for a business and accessibility to cash–whether in the form of a financial solution or working capital–indicate the company’s ability to generate returns, meet expenditure obligations and invest in further growth.
3. Cash Flow
Positive cash flow, whether through high margins of profitability or established financial solutions, is a crucial factor in determining a high business valuation. Investors, analysts and potential buyers will often look at cash flow calculations to determine the overall worth of a business.
4. Capital Structure
Business finance, particularly the mix of debt (such as a business loan) and equity (such as in the form of owning assets) can not just influence the financial decisions of a business and access to further lines of credit or working capital, it can also directly affect the valuation of a business through discount rates and risk assessments.
5. Growth Potential
A business with strong finances indicates opportunity for expansion and returns on future investments. Business valuations may consider many aspects of a company’s current health, but it is also focused on determining how efficient the company will be in utilising capital for growth.
6. Risk and Return
A business associated with high risk and low potential returns will result in a lower valuation. Business finance is a critical determinant in valuers’ assessment of the financial health of a business and whether the risk is too great for the potential return.
The Right Business Finance Solution
Access to working capital and smooth cash flow can be a challenge for many small and medium sized enterprises. The team here at ScotPac specialise in helping SMEs from all industries access the right financial facility to ensure their financial health is stronger and more sustainable.
As the largest non-banking lender in Australia and New Zealand, and a strong advocate for SMEs throughout the industry, there is no one better positioned to help you increase your business valuation than our specialists.
Whether you’re considering a business loan to inject a specific sum of investment into your business for future returns, or you’re more interested in leveraging the benefits of invoice finance, the right facility for your business’s needs and goals can be the crucial factor in a company’s success–reflected in its business valuation.
Breadth and Depth of Business Finance Solutions
Our lending specialists at ScotPac draws on a wide range of customisable, flexible and fast business finance solutions to ensure our client has the fuel it needs in its engine to succeed.
We’re constantly evolving and transforming the technology we use and the way that we use it to increase the speed and improve the accessibility of working capital for our clients.
Let’s Find the Right Fuel for Your Rocket to Success
Whether you’re ready to find the right business finance solution or simply want to learn how potential financial facilities can impact your business’ valuation, view our product selector today.
Our team is always here to provide one on one consultations to help tailor a specific solution for your needs, preferences and situations if you need a hand.