Know Your Gaps

As a Business Owner, do you know your gaps? There are many numbers that every business owner needs to know, but there are three that are critical, and knowing them and managing them will allow you to be successful in meeting your goals.

Profit Gap

• Profit Gap = The Profit You’re Sacrificing by Not Operating at a Best-in-Class Level = Best-in-Class Profit at Your Level of Sales – Your Actual Profit.

For this discussion, profit is best defined as earnings before interest, taxes, depreciation, and amortization (EBITDA).

To ensure an apples-to-apples analysis, your actual EBITDA should be re-casted or adjusted for extraordinary or one-time events, discretionary expenses tied to the owner, and costs currently above or below market rates such as rent compensation and others. 

Consider the good you could do in the business with the extra flow of profits.

Value Gap

• Value Gap = The Business Value You’re Sacrificing by Not Operating at a Best-in-Class Level = Best-in-Class Value if at Your Level of Sales – Your Actual Business Value.

The basis of the Best-in-Class Value begins with the Best-in-Class Profit at Your Level of Sales (determined in the Profit Gap analysis) 

The Best-in-Class multiple is applied to the Best-in-Class Profit. 

Your actual value should be based on your actual re-casted or adjusted EBITDA.

How quickly would narrowing your Value Gap close your final number your Wealth Gap?

Wealth Gap

• Wealth Gap = The Additional Wealth You Need to Accumulate to Meet Your Goal = Your Net Worth Goal – Your Current Actual Net Worth (not including your business)

For this exercise, do not include the value of your business as it is not easily converted to cash. 

Plus, you may or may not convert it into cash, depending on what you decide to do with it. As you consider your net worth goal, identify what you truly need to live your life the way you would like and what you want.

Bridging the Gaps

How will you bridge the gap?

Know your numbers. 

Know your gaps and develop a plan to close them.  

Then as a Business Owner, you are growing the value of your business, so it is transferrable and valuable. What a great place to be!