When it comes to making smart decisions for a business, most owners and financial planners want to focus on business worth—and for good reason. Evaluating a business’s worth is important, not only to ensure that the business remains profitable and is meeting its financial goals, but also as a tool to consider whether the business should be sold and, if so, what that sale price should be.

Taking the time to evaluate a business's worth will shine some light on processes that can be improved as well. For example, if significant spending is undercutting a business’s profitability and severely impacting its worth, changes can be made in that area to address the issue and increase the cash flow. The changes required might mean cutting out unprofitable avenues of production or tightening the reins on spending to become smarter about what costs the business incurs.

But how is business worth calculated? Several approaches exist, and all are in some way valuable. However, some calculations are considered more reliable than others, and each should be considered together to understand the full picture of a business’s health and financial standing.

Discounted Cash Flow

“How much cash does the business generate currently, and how much will it continue to generate in the future?” This is the question that discounted cash flow seeks to answer. A business using this method will take historical data on earnings and project those into the future. It will then convert those future earnings back into today’s dollars (this is called the net present value). 

Publicly Traded Comparables

One of the simplest ways to determine a business’s value is to compare it to other similar publicly traded companies. A business interested in pursuing this avenue of valuation often takes five to ten companies similar to it in revenue, size, and location and chooses a couple of metrics to measure from each company. The most commonly used metrics include price-earnings ratio and earnings before interest, tax, depreciation, and amortization (EBITDA), among others. Then, the average of these multiples is taken from among the sample comparable companies.

By examining how these metrics vary compared to other publicly traded companies, it becomes simpler to see how that business might be valued in the public market. However, lack of comparable businesses can make this method a challenge for some companies, particularly smaller businesses. 

Transaction Comparables

Using data from transactions to compare companies is similar to the publicly traded comparison mentioned above. The difference is that the numbers analyzed are not profits or expenditures but rather transactions. If a business in the public sector has similar transactions as the business in question, they may be comparable not only in data but in value.

Book Value

This method is a real number cruncher, as it relies entirely on the balance sheet and hard value of assets and liabilities. For example, the value of a business in this scheme would be derived from totaling all assets and then subtracting all liabilities. Because there is a lack of nuance and comparison in this method, however, it is not always a reliable indicator of the true value of a company.

Seller’s Discretionary Earnings

Seller’s discretionary earnings are the pre-tax income of a business (gross income). This is not the same as what’s reported on an income tax return, however.  Many businesses will use expense reporting and deductions to lower their tax burden on their actual tax return, which makes this newly reported number inaccurate for the sake of determining true value.

On top of the gross income, additional factors must be added back in to examine the business as it would be to a new buyer. These factors include expenses that aren’t necessary for running the business, such as charitable donations, perks that employees receive, and payroll of non-essential positions.

On top of this, add accounts receivable, cash on hand, and any real estate holdings, then subtract from this any business liabilities. This will generate the business’s estimated value.

Putting It All Together

Valuing a company and understanding what a business is actually worth can be a tricky process that varies widely across industries, locations, and sectors. Because of this, it’s best to use more than one valuation tactic to insure that a wide spectrum of data is considered. Using several valuation methods will ensure that the results will be more robust and accurate. Estimating a business’s value by projecting the earnings of the best month ever into the next ten years might look exciting, but it’s hardly realistic and may undercut smart business decisions. 

Take some time to identify business multipliers based on sector or industry as well as the average of important data vectors in comparable businesses to determine how a particular business might be valued. Some companies consult on business valuation, and relying on professional assistance with this process may not be a bad choice either.

Lead Tracking and Qualification

Once leads are generated, a management system that’s doing a good job can follow individual patterns in users to determine if they are a “qualified” lead. A qualified lead is someone who has the potential to buy something (rather than someone who is simply interested but unlikely to make a purchase). 

Lead tracking pulls a significant amount of data from leads—things like email engagement and whether potential customers are reading and interacting with the messaging that the brand uses. Similarly, other metrics to track include downloads (of what, when, and how often) to see if the client is putting faith and value in the brand. If a customer is doing these things, that can indicate that they are someone who is more likely to commit to the business after developing a personally beneficial relationship from it. 

Browsing patterns are another important factor in lead tracking. Examining the patterns that potential customers follow when they browse will enable a business to determine what the lead’s interests are and how likely that client is to convert. It will also harvest important individual patterns that can be used by a solid lead management system to provide enrichment—in other words, the lead management system may be able to provide personalized sales efforts based on the knowledge that the company has about that particular lead.

Once enough data has been collected about a lead by the management system, a determination can be made on the lead’s “qualification.” Only those customers who are ready to commit, are engaged and interested in the brand should be qualified; this helps to ensure that spending and other efforts are dedicated only to those clients most likely to convert. Engaging with qualified customers helps businesses avoid wasted spending on low-quality leads. After this, leads can be distributed to the right departments; a savvy lead management software will do this automatically.

Communication

Once leads have qualified, a company can direct spend toward them in an attempt to convert. This process, called "lead nurturing," is another feature that management systems handle well. Lead nurturing guides the potential customer the rest of the way through to becoming sales ready. Based on what the lead management system has already gathered in data about the user, personalized messages are sent targeting that client’s pain points while providing helpful information and opportunities for conversion. 

These touchpoints might include such things as product demos, videos, educational content, and even promo offers targeting the items that will engage that particular lead. All of this can be calculated by a lead management system to reduce the burden on in-house employees.

How a Lead Management System Increases Revenue

It is likely already easy to see how a lead management system can improve not only the workflow of a business but also its lead accuracy. Increases in efficiencies like these offer several money-saving opportunities for businesses in addition to the potential for further increases in profit and revenue growth.

For example, consider the expenditure of a company where leads are not targeted and qualified. How much money is spent targeting customers who will never convert, have not interacted with the brand in some time, or have already fulfilled their needs elsewhere? Cutting this spending by using a more refined system will save money in both the short and long term.

Similarly, by targeting customers who are more likely to convert and providing them with more personalized material courtesy of a lead management system that has gathered and sorted this individualized data, clients are more likely to not only convert but to become lifetime customers. Boosting their LTV (lifetime value) creates further revenue for the company in the long term. Since these converted buyers are already loyal to the brand, the process of targeting them can shift into a lower gear and save expenditures; it will almost always be cheaper to retain than to bring in new customers.

Finally, a lead management system can improve the overall flow of the business by pointing out weak areas that are handicapping conversion rates (and thus, profits as well). Whether the hang up comes from a long sales cycle, lack of engagement, or simply not enough team bandwidth to handle all of the incoming leads, a management system will automate much of the process and demonstrate where these holes are so that they can be fixed for greater efficiency and conversion potential.

Keeping Up with the Books

As a child, I was taught the importance of being handy and self-sufficient. Whether it was a problem with the truck’s alternator, a peeling coat of paint in the den, or a from-scratch dinner that had to feed six, my parents instructed me that I should not rely on other people for the little things. Doing things myself, they told me, would ensure not just that I could take care of myself in a jam, but that I would be forced to keep an eye on what was going on around me.

So, when I started running a small business, I automatically started keeping my books myself. Now, I didn’t do it without help. I hired a bookkeeper to check my work and get me through the first couple of months when I didn’t really know what I was doing. But for the most part I handled all the bookkeeping myself.

What I thought would be a painful chore turned out to be an invaluable looking glass into the health and well-being of my new firm. Like an auto enthusiast listening to her engine as she drove, I was keeping a close eye on my finances. Normally, nothing looked amiss. From time to time, though, I would see patterns or one-off events that didn’t coincide with what I wanted my company to look like. A large recurring transaction for an unneeded Software-as-a-Service product. Rising payments for office supplies that suggested a need for better virtualization and automation.

The point is that, if cash is king, then keeping your own books is the small business version of keeping an eye on what the monarchy is doing.

The “How”

You may be wondering if you’re even capable of keeping your own books. After all, you may have no background in accounting or any affinity for math. That’s alright. Most people don’t. Rest assured that the mathematics of it all is quite simple (although an exacting eye is required to avoid errors.) And the accounting part is easy to learn. At the end of the day, many people are fully capable of bookkeeping (mostly) on their own.  

Accounting Basics

For those with absolutely no financial education or training, we would strongly suggest an online course. Coursera, Udemy, edX, and others all offer fantastic online courses on Financial Accounting that will teach you the basics of double-entry bookkeeping.

Keep in mind that you’re not preparing for a career as a Chartered Accountant. It’s alright if some of the more advanced material doesn’t quite click. You’re taking these courses to get a handle on the basics. What are debits and credits? What are the major financial statements I need to understand?

The Software

Once you’ve got some understanding of basic accounting principles, you can turn your mind to the physical realities of putting pen to paper or, better yet, fingers to keys. It’s our view that you’ll be doing yourself a disservice if you forego all the fantastic options you have at your disposal when it comes to bookkeeping and accounting software.

Electronic bookkeeping is the reason my first foray into this discipline was relatively painless. Although I had to deal with the added difficulty of learning a new piece of software, the time I spent learning the program was more than made up for in the time that software saved me. Automatic reconciliations, auto-populated financial statements, and pre-formatted journals were all a godsend to someone like me who was learning to do this for the first time. 

Of course, there is something to be said for those intrepid few who keep their first set of books manually, with only a pencil and paper at their side. They will surely be forced to learn the intricacies of keeping a set of books and learn them well. But for those of us who are not gluttons for punishment, and are perennially short of time, an electronic solution is likely the best bet.

Which program you choose to use is up to you. I personally prefer QuickBooks Online, a cloud version of Intuit’s popular accounting software, but your mileage may vary. There are plenty of excellent software solutions to choose from. Compare their feature-sets and decide which one is best for you.

If the choices seem overwhelming at first, draft a short list of the features you absolutely must have, the features you’d appreciate but don’t need, and the features you wish to avoid. For example, when I was in the market for software, I was looking for a cloud solution that allowed access to my books for at least three people (me, my accountant, and the aforementioned backup bookkeeper) from any location. I wanted it to be secure, encrypted, and easy-to-use.

I wanted it to be able to handle legal trust accounts (because I was running a law firm). I didn’t want a desktop solution, because I didn’t want to worry about external backups or ensuring my own security. QuickBooks Online happened to fit the bill quite nicely.

The Why

I’ve already alluded to the main reason you should consider keeping your own books. Doing so forces you to keep watch over all your firm’s financial dealings. Not only will individual transactions be brought to your attention, interesting patterns will begin to come to light. Those stubborn areas of inefficiency in your business will become painfully obvious when you’re forced to journalize their rising expenses. That employee with remarkable numbers will not go unnoticed as you tally her sales and commissions.

Too many small business owners work “in” their business, rather than “on” their business. That’s a cliché you’ve probably heard before. For those who are unfamiliar with the expression, it refers to those small business owners who competently fulfill their duties as an employee of the business but fail to take any supervisory or leadership responsibility when it comes to the business itself. Keeping your own books is a straightforward way of ensuring that you have the information you need to make intelligent and forward-thinking decisions about the direction and future of your company.

What Not to Do

While we fully recommend you take charge of your company and keep your own books, there is a smart way to do that and a not-so-smart way. Let’s begin with the latter.

Support

Whatever you do, don’t dive into the world of bookkeeping with no help or backup plan. Your books are the autobiography of your company. If you make too many mistakes (and you will make mistakes) it will be a nightmare for someone to try and go back to the beginning and fix everything. In the meantime, you’ll be flying blind, without any accurate financial information.

Instead, ease your way into bookkeeping gradually. While you can immediately take responsibility for your books, have a bookkeeper on hand who can check your work. At first, these checks should come frequently:;every couple of days or so if possible. As time passes, the frequency of these checks can become greatly reduced. You’ll be amazed at how quickly you become expert at all things accounting with daily practice.

Trust and Sensitive Accounts

Some lines of business involve the handling of sensitive sorts of accounts. Law firms, for example, must handle client trust accounts, about which each state bar association has reams of rules and regulations. If you happen to be in an industry that contains special rules about the handling and maintenance of specific kinds of accounts, give careful thought to keeping your own books.

You may still wish to handle your own accounts but know that one small slip-up could lead to major consequences. The advice I gave in the previous section about maintaining professional support in the form of a bookkeeper to check your work goes double for people in sensitive industries. When mistakes are unacceptable, it is unacceptable not to have a second person on the lookout for mistakes.

You should carry this attitude with you whenever you are dealing with your finances. For example, even companies that don’t deal with trust accounts or sensitive information must make choices that have significant legal effects. “Is this person an employee or an independent contractor?” “How much income tax should I withhold from this paycheck?”

The answers to questions like these shouldn’t be given without any input from legal or accounting professionals. Just because you can do your own books, doesn’t mean you don’t need an accountant and/or a lawyer.

Procrastination

“I’ve had a long day. I’ll do my entries tomorrow.”

“This week’s been tough. I’ll handle the journals on the weekend.”

Sentences like these may be easy to speak, but their consequences are anything but easy to untangle. Keeping your books is like doing the dishes. If you do a little bit every day, the task is easy manageable. If you procrastinate, you’ll soon find yourself in over your head.

Self-bookkeeping requires constant attention. Now, this doesn’t mean you need to spend all day, every day with your head in the books. It just means that you’ll likely have to record entries and manage your accounts every couple of days. For some detail-oriented people, this is no problem. The minutiae of accounting serve to relax these people. Others, who find the task monotonous, may need to find some extrinsic motivation to maintain the job.

What to Do

So now that you know what not to do, where do you go to ascertain what to do? Luckily, you probably already know the things you should be doing. As I mentioned above, learn everything you can about the basics of accounting and double-entry bookkeeping. You want to be reasonably proficient in it, to the point that you can have an intelligent conversation with your backup bookkeeper and accountant. You also want to be able to understand why you’re doing the things that you’re doing and making the entries that you’re making. A thorough understanding of the theory behind double-entry bookkeeping will prevent many silly mistakes.

You want to be careful, professional, and cautious with your books. Treat them with the care that they deserve. These are the documents that record the health of your company. Pay close attention to them, keep them up-to-date, and accurate. Have a professional double-check your work from time to time. When you’re trying to figure out if you’re spending enough attention and time on your books, ask yourself this question: Can I, using my books, explain where my business has been, is right now, and will likely be in one year?

Wrapping Up and Key Takeaways

Hopefully our article has served to provide you with some background knowledge about bookkeeping that you might not have had before. We hope that the thought of keeping your own books is not as overwhelming as you may have found it when you started reading. Before you go, review some of these key takeaways on what we’ve just discussed:

• The main reason to keep your own books is that it’s the best way to keep an eye on the financial health and well being of your business.

• Basic accounting knowledge is a must. If you already possess it, great. If you don’t, there’s dozens of excellent online courses that can teach you the fundamentals in no time at all.

• Commit yourself to buying one of the leading software suites for accounting and bookkeeping. While journaling in pencil and paper is a heroic and praiseworthy task, electronic bookkeeping is faster, easier, and more flexible than the old-school method.

• Especially at the beginning, keep a professional on retainer to check your work. You’re bound to make mistakes and, when you do, you want to be quickly corrected so they don’t happen again.

• Pay careful attention to trust accounts, or similarly sensitive transaction categories. 

Stay up to date on your books. If you let things fall by the wayside, you’ll find it difficult to pick up and get going again. The best way to avoid this is to just keep plugging away every week. Make keeping your books a habit.