Three Ways To Create Incremental Value In Your Business

The value of a company in financial terms is the sum of all future Free Cash Flows (FCF) discounted by the Cost of Capital (WACC) to the present year.

Any initiative (Lean or otherwise) that aims at creating incremental value should result in an incremental Free Cash Flows (FCFs) in the coming years. FCF is the money available to the shareholders of a company in the form of dividends, after deducting the reinvested amount from the net profit after tax.

Free Cash Flows for the future years can be increased in three ways:

  1. Cut down the costs and pass on the savings to the shareholders. Reinvested amount in this case remains the same.
  2. Reduce the reinvestment, but generate the same results (profit margin % and growth %). This is possible if the reinvested amount is put to use more efficiently. In other words, incremental value can be created by increasing the Return On Invested Capital (ROIC).
  3. Finally, incremental value can be created by Revenue growth. Even if the % profit margin and % reinvestment remain the same, revenue growth causes the FCFs to increase, thereby increasing the value of the company.

 

 

Understanding Cause & Effect

The understanding of cause and effect is essential if you want to make a change that works – whether you want to change your habits, improve your health, or change an organisation for better performance. In this video, I will discuss various ways in which causality works.

Everything Has A Structure

Hello there. Welcome to my blog and this and my first post. Do you know that everything in this world has a structure? We know businesses have structure. In fact a Lean Business is essentially a structurally optimised entity to deliver the maximum customer value with a lot lesser resources and time. But what do I mean by structure of everything? Well, I mean, everything. There is nothing that has no structure. Everything has structure.

If you are trying to understand and unpack something, you mind find this structural approach very useful.