Preventing a Financial Crisis in Your Small Business With Correct Valuation

If you’re running a small business, there’s always a danger that you may fall prey to short-termism. This phrase is sometimes used to refer to the phenomenon of excessively focusing on results in the short-term at the expense of value creation and long-term business interests. Although this is a trap that many small business leaders fall into, it’s one that every company owner should be aware of and avoid whenever possible.

Short-Termism In Practice

There have been many examples of this in popular culture and living memory. We need only look at the early 2000s and the bursting of the dot-com bubble to see a classic example of short-termism in practice. Investors and banks alike forget the vital principles of value creation. They were so keen to get involved with the latest rapidly-growing technology companies that they carried out virtually no research and made no proper valuations. As a result, they made significant financial losses when it became obvious over time that internet companies simply didn’t have the competitive advantages that had been assigned to them by the market.

During the 1990s, the East-Asian debt crisis is just one example of short-termism that failed an entire market, while the 1980s’ loan and savings catastrophe in the USA is another. Both of these spectacular failures happened because of high-risk investments that aimed to turn impressive profits with a short-term perspective.

It’s clear that short-termism is often destructive for markets, and history has revealed this many times. If a focus on only the short-term result is allowed to get in the way of longer-term actions that create value, the balance will be skewed negatively. As a consequence, the market’s credibility will eventually be undermined, fewer investments will be made and, potentially financial disaster will ensue.

The Importance Of Long-Termism

There is some disagreement amongst researchers about why short-termism happens. Some say that it occurs because, as human nature, we yearn for immediate gratification. Meanwhile, others say that greed is to blame. However, whatever the cause, most experts agree short-termism is both expensive and irrational. Eventually, the rules of economics prevail. This is why an accurate and sound business valuation prevents you from becoming caught up in group thinking and market trends.

Long-term strategies to create value serve both the market and your company well. You must generate profits and cash to create more value. Focusing on growth first in the home of generating profits and cash is considerably riskier. It’s essential to view long-term goals in more credible ways.

Seeking Professional Business Valuation

The upshot of all this is that it couldn’t be more important to seek out a professional business valuation for your small company. Global Resources LLC can offer an expert consultancy service to value your company and give you a clearer picture of your organization’s overall worth. Whether you’re running a small or medium-sized business, our skilled team is on hand to help so that you can achieve your business goals in the most effective manner.