There are times when your small business may need to undergo a valuation, such as when preparing to sell your company or start a round of equity-based funding. In all of these cases, getting this valuation done right is key to your future business success.

Why should you value your business?

Knowing the value of your business can help you make better business decisions and set realistic goals. It can also be used as a benchmark and is often required to obtain funding. Whether the valuation is for purely informational purposes or you need an official valuation to undergo a business transaction such as beginning a new round of equity financing or splitting the company in a divorce, it is important to know how much your company is worth. Keep reading for more detail as to why it’s so important to know the value of your business. 

Reasons to value your business

There are a few main reasons why a company might undergo a business valuation, here are a few.

• Preparing to sell: The most common reason for undergoing a business valuation is when you are looking to sell your business. A business valuation helps you determine where to set your listing price and estimate how much you can expect to receive if you do place your company on the market. You may even decide to hold off on selling your business in the first place.
  

• Preparing for a merger: A valuation is typically needed when preparing to undergo a merger or an acquisition. In M&A transactions, oftentimes both the target company and the acquiring company will undergo a business valuation on the business that is being acquired.
  

• Attracting investors: You need to know your business valuation when seeking equity-based funding, because it lets you (and future investors) know what the equity in your business is truly worth. Types of equity funding include initial public offerings (IPOs), angel investing, venture capitalists, and equity crowdfunding. Business owners use equity funding to finance business needs in exchange for an ownership stake in their company.
  

• Offering equity to employees: Similarly, there are times when growing companies wish to offer equity to their employees as a reward, incentive, or bonus. You must undergo a business valuation first in order to know (and prove) how much equity in your company is worth.
  

• Developing strategy: Whether you want to incorporate your business valuation into your business plan, financial projections, or other futurecasting – knowing where you are and where you have been can help you more accurately determine where you are going. Undergoing a business valuation also gives you a good idea of your company’s current strengths and weaknesses or areas of opportunity.

While these reasons are by far the most common, other reasons may include buying out the other owners, undergoing a change of ownership, a life event such as a divorce, or tax planning.

Tips on how to value your business

While many people hire a professional to undertake their business valuation, it can be done yourself. Either way, the following tips should help the process run smoothly:

• Get your paperwork ready: Financial documents help back up calculations. Be prepared to demonstrate your company’s debts and assets through documentation such as profit and loss statements, bank statements, tax records, and balance sheets.
  

• Determine future profitability: The easiest way to do this is by calculating net profit for the past few years and accounting for future revenue with average industry growth. Understanding your business value can help you track growth and set realistic benchmarks. You can also compare these benchmarks with your industry.
  

• Estimate the value of your business: Use a few simple calculation methods to estimate the current value of your business. For example, the simplest valuation method uses the following equations: Gross Profits – Expenses = Net Income and Net Profit x Multiple = Value. To determine your “multiple” you will have to research the multiples that similar companies have sold for and consider the size and financial history of your business.
  

• Know the different methods: Different appraisers may use different methods, and different circumstances call for different methods – so having knowledge of these may help you determine which valuation would be most favorable for your business. These methods include the Adjusted Net Asset Method, the Capitalization of Cash Flow Method, the Discounted Cash Flow Method, the Market-Based Valuation Method, and the Seller’s Discretionary Earnings Method.
  

• Perform a market valuation: Just like when you are selling a house, market conditions and looking at “comps” are some of the most important factors when preparing to sell. A higher demand for businesses like yours can drive up your value, while slow growth and low interest in your field can eat into your final valuation. Ultimately, your company is only worth the price that buyers are willing to pay for it – no matter how good your financial projections are.
  

• Create financial projections: Financial projections look at how much profit you are currently generating and produce an estimate of how much your company will generate in the future. Knowing these numbers will also help you determine the best times to raise capital and undergo a new round of equity-based funding.
  

• Don’t forget intangible assets: While it may be easy to determine the value of a vehicle or large piece of equipment, don’t undervalue your business by selling yourself short. Intangible assets such as copyrights, patents, trademarks, client lists, SEO rankings, and even social media followings can all affect your final business valuation.

Tips for improving the value of your small business

In order to increase the value of your small business to get a better valuation, there are a few things you can do.

• Run some models: An appraiser can help you produce a range of valuation models with different outcomes. For example, you can run the numbers to determine how more revenue per customer or higher churn would affect your future business valuation. This process will help you determine where to best focus your efforts.
• Increase revenue: At its most basic calculation, your business valuation is determined by your profits. One of the best ways to improve your profits is by increasing your revenue, whether by making your prices higher or increasing your sales volume. An appraiser can also help you determine where to best focus your efforts to see an increase in revenue.
• Cut costs: On the flip side of the coin, cutting costs can also help improve your profits even if your revenue stays the same. Can you downsize your retail location? Cut back on staffing? Decrease your marketing budget? Research where you can effectively cut costs without eating into your revenue.

How Kickfurther can help

Securing funding is not an easy task, but it’s something that most small businesses must do to maximize growth. You may jump through several hoops and qualify for traditional financing, only to find out it’s far too expensive. There’s also the case that you are just struggling to qualify for traditional financing methods. Small businesses are the heart of most communities, yet they often have the hardest time obtaining the funding they need. 

Started by an entrepreneur who once struggled to find affordable financing – that was also attainable, Kickfurther was born. Kickfurther is the world’s first online inventory financing platform that enables companies to access funds they were unable to acquire through traditional sources. 

So how does it work?

Kickfurther has companies start by creating a profile. Next, we connect brands to a community of eager buyers who help fund the inventory on consignment and give brands the flexibility to pay that back as they receive cash from their sales. Flexible repayment schedules alleviate cash flow challenges that are often made worse by traditional lenders. Small businesses can take advantage of flexible repayment schedules by allowing the brand to scale quickly without impeding your ability to maintain inventory. To qualify for funding through Kickfurther, brands must sell physical products or non-perishable consumables. In addition, brands must have revenue between $150k to $15mm over the last 12 months. Our average funding amount is $78,000, but businesses can fund up to $1MM to manufacture new inventory or get reimbursed for current stock.

Closing thoughts

Whether you need to know your business valuation or not, you SHOULD know it. A successful business is efficient, organized, and always has a plan. As you set out for any type of funding, the lender, investor, backer, or source of funds will need to trust your businesses ability to succeed. Backers within the Kickfurther community definitely enjoy connecting with brands, which they can do through business profiles. With 800+ opportunities funded and a 99% funding success, you can get the funding you need at Kickfurther, but you will need to put in a little bit of work. The opportunity to get funding through Kickfurther means the opportunity to save money while growing your business. At Kickfurther our rates are up to 30% cheaper compared to other forms of funding. Furthermore, companies that return for additional rounds of funding often see their rates fall each time. 

Interested in getting funded on Kickfurther? Create a free business account today to get started!

How do purchase orders work?

Purchase orders generally operate in good faith. They are a form of credit that the buyer and seller partake in outside of traditional banks and financial institutions. Purchase orders are typically for non-retail transactions between two businesses. When a buyer needs a specific product or service from a supplier or a vendor, they will generate a purchase order in their accounting system. A purchase order should contain the following bits of information.

1. Billing address of the buyer
2. Delivery address of where the goods need to be delivered
3. Product or service being purchased
4. SKUs or model numbers of the specific products
5. Quantity
6. Price per unit
7. Any wholesale discount information that applies to the purchase
8. Payment terms

Once the purchase order has been generated, it’s then sent to the supplier or vendor via mail or digitally. Once the seller has received the PO, it’s customary for them to reply with an order confirmation that details the following bits of information.

1. Date that the goods or services should be delivered
2. Confirmation of quantities that will ship and that are currently in stock
3. If any backorders will need to be placed, and if so, which products and how many of each
4. Payment terms

Once the goods or services have been delivered as promised, the buyer then can pay the seller either upon delivery, or if the buyer and seller have a type of business relationship, the seller may offer terms of net 30, 60, or 90 days.

The main idea of the purchase order is to maintain a paper trail between the seller and buyer that confirms a buyer’s intentions. Also, purchase orders help to maintain the accuracy of inventory and finances, ensure faster delivery of goods and services, and are instrumental to each company’s accounting departments. 

Who typically creates the purchase order?

Purchase orders are created by the buyer. If it’s a small to medium-sized company, typically the business owner, operations manager, or financial manager may create purchase orders. In larger companies that make hundreds of large purchases every month, they may have a purchasing department with specialized buyer roles. Part of being a buyer is to negotiate discounts and terms for larger purchases with a seller’s internal sales department. 

Types of purchase orders

There are several different types of purchase orders. Some of the most common types of POs include standard, planned, blanket, and contract purchase orders. Here are each of these types of purchase orders in a little more detail. 

• Standard PO: A standard purchase order is created when all of the details of the goods and services being purchased are known. A standard purchase order is typically a one-off procurement containing the price, quantity, payment terms, delivery timelines, and location. 
• Planned PO: A planned purchase order is more of a long-term agreement between a buyer and seller that commits that the buyer intends to procure the goods or services of the seller only from that specific seller. Planned purchase orders contain all of the same information as a standard purchase order, however, they may also specify how often they would like the order to be duplicated.
• Blanket PO: A blanket purchase order, or blanket purchase agreement, is when the buyer knows the quantities of the goods and services they want to purchase from the seller over a specific period of time, however, they are unsure of when they would like the goods or services to be delivered. Blanket purchase orders are often used by buyers to negotiate discounts and more favorable terms from the seller. 
• Contract PO: A contract purchase order is an agreement between buyer and seller that confirms specific terms and conditions, however, a contract PO may not indicate which goods or services are to be purchased and when. Instead, once the contract purchase agreement is in place, the buyer can begin to issue standard purchase orders that contain the agreed-upon terms and conditions.

Purchase order vs. invoice – what is the difference?

A purchase order is a document that outlines a buyer’s intentions of making a purchase. It contains the desired products, quantities, delivery location, and billing information of the buyer. The invoice is the bill that the seller sends once the order has been fulfilled. 

How is a purchase order created?

A purchase order can be created through a template or some accounting software may contain a purchase order generation tool. Either way, once a decision has been made that specific quantities of specific goods or services are needed, a purchase order puts that information in writing to notify the seller of the intention. The purchase order can be mailed in paper form or sent electronically through email or through a seller’s order system. 

What is the role of purchase orders in inventory?

A purchase order helps to keep a record of specific products and quantities. For example, when a seller receives a purchase order, they know exactly how many of which products are needed to fulfill the order. When the order is being fulfilled, the fulfillment team can accurately pick the correct number of each product and help maintain the accuracy of stock numbers. If the fulfillment team goes to pick an order and they are short on inventory, then it can be noted in the inventory management system to update the stock to account for the missing items, and potentially an investigation will follow.

For the buyer, a purchase order can help when receiving a product. The receiving department of a company typically checks all shipments against a purchase order to make sure that the correct products and quantities were sent by the supplier. If items are missing, they can then notify the seller and the seller can either ship out the missing items or credit the buyer’s account. When the items are received, the buyer then also can enter the quantities and products into their inventory management system to help ensure stock accuracy on their end.  

How purchase order financing can help your business

If you’re a seller, you may be able to obtain financing from the value of your pending purchase orders. For example, if you are in need of short-term funding, financing companies can pay you in advance for an anticipated amount based on how much you are estimated to receive based on the value of the purchase order. This can give some short-term cash flow to companies that can use the money to help fulfill orders that they may not be able to fulfill on their own. This can help them purchase supplies, hire staff, and take other steps to produce the goods or services that the buyer is requesting. 

In exchange for the upfront funding, the financing company typically takes a certain percentage of the total sale price that can be paid when the buyer pays the invoice for the order. 

Closing thoughts

Ensuring order terms are clear and payments are timely are a critical part of buying and selling inventory. As you ramp up sales, you may find that you need inventory funding. In the event that you do, backers will want to see an organized inventory system and healthy financials. Product based businesses that sell physical products or non-perishable consumables and have revenue between $150k to $15mm over the last 12 months can qualify for inventory funding at Kickfurther. 

Kickfurther is the world’s first online inventory funding platform that enables small businesses to access funds that they are unable to acquire through traditional sources. We connect brands to a community of backers who help fund inventory on consignment and give brands flexibility to pay that back as they receive cash from sales. 

Kickfurther can help startups and small businesses fund millions of dollars of inventory at costs up to 30% lower cost than the competition. With more than $100 million in inventory funded to date, Kickfurther can help you get funded within a day or even minutes to hours. 

Interested in getting funded at Kickfurther? Here are 3 easy steps to get started:

#1. Create a free business account

#2. Complete the online application 

#3. Review a potential deal with one of our account reps & get funded in minutes

Learn more about purchase order financing.