Many entrepreneurs start operations without knowing the value of the business. That is, put into numbers how you can win in business and determine whether it is worthwhile or not. Generally used in preparing the business plan to measure expected utility, but also can be used by a company established to find out if you are generating the money that was expected. In this post we will see three ways to measure the value of a business .
1. Expected utility
The most familiar to measure the business value is to define what the profits or earnings generated by the business. In theory, we use this formula to find the utility:
Profit = Total Revenue – Total Costs
For a small business may be relatively easy to determine its utility, but requires registration and control of their revenues, costs and expenses. For the median company, requires a cost analysis which are considered fixed costs, variable costs, sales expenses, taxes, etc.
The result is known in finance as green or red numbers. Green numbers mean you are having a positive balance to the previous equation. However, when costs exceed income, determine a loss or said that the company is in the red.
2. Net Present Value
The 2nd. way of knowing the value of the business or business project is the Net Present Value or NPV. This lets you know if the investment we make to start a business is the best we can get over the project, compared to other projects (like putting your money in a mutual fund or a savings account).
The result which gives us is an amount. The rule is that if the NPV is less than 0, means that it is not worth the business. It is as if at the end of all his work, had not won anything. If the result was different, as $ 1,000,000, means that if we sold the project to a shareholder, the value of this is $ 1,000,000.
The financial analysis should be done in an excel sheet, it needs to estimate the flows of income and expenses will have on the duration of the project. For example, for a building project of residential home sales, the project can last between 3 to 5 years from the onset of management procedures, to the entry of final payment on the house built.
3 data are required: The initial investment, cash flows and the discount rate (ie, a rate to compare the handling of money invested, as the rate of a bank). In Excel, in the features section you can find the function of “Net Present Value” or “Net Present Value.”
3. Internal Rate of Return
The third way to calculate the value of the business is the Internal Rate of Return or IRR. In simple terms, we are showing the “interest rate” project. Just as a bank gives you an interest rate, your project may be measured in the same way.
Therefore, the IRR is measured in percent. If the project gets a 10% IRR, against a bank rate of 3% means that we are gaining a further 7% to our money if we develop the business.
The calculation requires 2 things: a Net Present Value and Discount Rate (as the bank). In Excel, functions in the tab, you can easily find the option to calculate the IRR.
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Posted in Business Info | 
Tags: Business, Discount rate, Internal rate of return, investment, Microsoft Excel, Mutual fund, Net present value, Rate of return