Improving margins and consequently company valuation can be achieved through the increase of sales or the reduction of operating costs. Alfa Energy has no influence on the former element, but we specialise in the latter.
Improving your margin
Say your cost structure shows that 10% of the overall cost budget is spent on energy: gas and power. Envisage you lower these costs by 10%. Your saving on the overall operating costs is then 1%, from 10% down to 9% of the cost total. This improvement flows down directly to the bottom line. So if your margin was 3%, it is now 4%– an increase of 33%. You have hence just improved your margin through mitigating the energy costs.
The immense leverage of the savings in energy costs
Leverage is used to increase the return on an investment and/or business valuation through different financial instruments. One of these instruments is the operating margin. Any savings of operating costs increases margin, which in turn has an immediate impact on the company valuation.
You have just seen how the margin is improved through energy cost mitigation. Improvement in margin feeds into your company valuation through the price/earning ratio. Say your P/E is 10. Every £100k saving on energy costs adds £1 million to your business valuation.
I’ve shown you the business case of the leverage in reducing energy costs. Here are solutions to achieve these savings:
- Having a holistic approach and a robust process of reviewing the supplier products and identifying the most suitable and cost-competitive option is the first step.
- Strategic commodity, buying and selling from and into the market to achieve the most optimal average price is the following step.
- For further optimisation of your energy costs, the next logical step is demand-side management and on-site power generation.
No two companies are identical, and there is no recipe suitable for everyone. Your case is unique and requires a bespoke approach for better risk management.
