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The price of a share does not tell you the value of a business. The type of business valuation is key in decision-making. What business valuation you are assessing will depend on why you are making a point of valuing a business:
- The value of a business an employee will want will depend on why the employee is working for a business. Some employees live from pay cheque to pay cheque and regard the business to be worth merely the value of pay received each month or week. Other employees see a business as a stepping stone to next career progression and value the business reputation in the marketplace rather than a monetary value will be of more importance. Other employees want to be fully engaged in the mission of the business and need to be kept fully onboard with business plans to place positive value in the business.
- Investors traditionally have sought capital appreciation, income or both from their investment in a business. Anything that detracted from profit or revenue generation may not have been welcomed. The proliferation of the Woke Society, if you are ungenerous or socially responsible if kinder, means that ethics social responsibility and good governance (ESG) has meant that many investors want better holistic enterprise risk management (ERM) performance. New jobs have even been created at board level to reflect this, such as Chief Impact Officer responsible for every process that generates any kind of social and environmental impact (as defined by the company’s mission and values).
- Customers are valuing businesses differently. Many more consumers use their spending power to punish poorly managed businesses in field of ESG or ERM, and reward businesses performing well in the ESG or ERM arena. We used the word arena deliberately as ESG or risk management in general is now often used as a show pony or window dressing when in reality the business is performing badly in the real world of managing all business risks well.
Business leaders will respond to regulation of their business but in the heavily regulated world of financial services, for example, we still find yearly evidence of poor risk management by banks despite nearly two decades passing from the time the banks nearly sent the whole world tumbling over the abyss to total societal collapse due to the banks regulators and politicians failing to manage business risks holistically well in 2008.
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Many are frightened that the next 12 to 24 months will see a long period of economic depression due to failure to manage risks well
Think inflation is bad now – you ain’t seen nothing yet! A food shortage will result in millions starving in 3rd world countries and hyper food inflation in 1st world countries. We are not going to starve but we are going to pay for poor business and economic risk management.
The share price of many businesses over the next couple of years are going to collapse. However, the same businesses value will not have fallen, just the share price. Investors including the person in the street through pensions will see the value of their retirement fund drop off a cliff. Employees will lose their pay cheque to pay cheque existence as many will lose their job. Consumers will pay more for the same or poorer products and services. What are you going to do to protect yourself?
What can you do to manage the risks to business value?
- Employees need to keep to keep abreast of the health of their employers business. They may even be wise to pick a different employer who is stronger if they can assess which businesses are strong and which businesses are weak.
- Investors maybe better out of the marketplace, or keep up with regular investing. It is counter intuitive. However few can pick the moment of a bear market turning into a depression. The only good thing about a depression is that it will be a good time to invest! Likewise no one can identify the bottom of a market. One solution is to get out of the market but the other is to invest through the depression to get the benefit of the lows to compensate for the loss of the highs.
- Consumers need to diversify to protect themselves from loss of money in one area. Cash is king just now. However globally governments are even destroying the value of cash in more ways than one! Real wealth is having enough money to pay for your lifestyle without needing to work, for as long as possible. You may outwardly have money but wealth is measured in financial freedom not in currency or other assets. The value of many perhaps most assets is set to fall.
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