Using a Principles-Based Approach to Enhance Business Value
A principles-based approach to creating business value uses a decision-making framework that combines a deep understanding of timeless biblical truths, sound knowledge of economics and investments, and an in-depth evaluation of risk dynamics. This framework is derived from Ronald Blue Trust’s Principles-Based Investing philosophy.
How Can a Principles-Based Approach Create Value for My Business?
Our job as business leaders is not to create outcomes, but to be faithful. Faithfulness is applying biblical wisdom to how we operate our businesses and trusting God with the outcomes. Our experience indicates that, over time, companies built on these principles will exhibit the following characteristics:
- Faster and more sustainable growth
- Improved valuation compared to peers
- Reduced risk due to diversification and scalability
Clearly, this approach can result in favorable outcomes for a business. From a practical perspective, there are four principles business owners can consider and address to enhance value.
Principle One: Uncertainty
This principle acknowledges that the future is uncertain. Provision against uncertainty is the reason to plan, save, and invest.
How to Apply This Principle to Create Value: Reduce the risk of uncertainty by developing owner independence, improving debt usage and structure, building sustainable financial statements, strengthening profitability margins, shortening cash conversion cycles, and performing legal audits.
Principle Two: Instability
This principle acknowledges that markets are not stable and that even provisions against uncertainty are not assured. Risks need to be managed through diversification and an appropriate allocation of wealth and risk.
How to Apply This Principle to Create Value: Reduce the risk of instability by diversifying the supply chain and customer base, strengthening the revenue model, aligning the compensation structure, increasing client satisfaction, improving product and market development, and fortifying both quality assurance and quality control efforts.
Principle Three: Human Productivity
This principle acknowledges that productivity is the combination of human creativity and natural resources. Wealth is created as a result of human productivity.
How to Apply This Principle to Create Value: Increase the company’s productivity by developing covenantal culture, preparing and equipping next generation owners and leaders, evaluating employee morale, developing long-term incentive plans, measuring labor efficiency, assessing scalability of human capital, and strengthening HR policies and procedures.
Principle Four: Inherent Value
This principle acknowledges that eagerness for gain, or fear of loss, can drive companies to make unhealthy decisions. Opportunities or risks can be identified when a disciplined valuation process is used to determine the inherent value of a decision.
How to Apply This Principle to Create Value: Incorporate value creation into the strategic decision-making process by developing a three to five year strategic plan (including financial projections), using net present value analysis for corporate finance decisions, forecasting valuation utilizing discounted cash flow analysis, and using a strategic decision-making matrix.
Here are some questions to consider as you reflect on how this information applies to your business:
- What are the major risks facing my business? What is my company doing to mitigate this risk?
- How productive is my current team? What does my company do to maximize human creativity?
- Are my strategic decisions connected to the value of the company? If so, how do I measure their impact on value?
Understanding these principles and evaluating one’s own business are the first steps. Developing and implementing an actionable plan that enhances value follows. Would you like personalized guidance as you think through creating value for your business? Ronald Blue Trust’s Business Consulting division leverages biblical wisdom and practical expertise to advise business owners as they seek to faithfully steward the companies with which they have been entrusted. To learn more, view our fact sheet or visit our website.