Business equity should be of interest to all those people who make it their business to deal with finance. Essentially it is the marketable part of the business value. Income on the other hand consists of revenues that revert back to either the business or to the owner’s personal expenditure. In order to create equity the business owner might be forced to cut down on the income in order to invest. On the other hand in order to create income the business owner might be forced to reduce his personal income. The tension between these two objectives will determine not only the structure of the business but also the type of business activities it undertakes.
Why generate income?
One of the key business objectives for entrepreneurs is to make profit. They are able to resolve a high degree of risk on the understanding that if they make the right business decisions, the profits will more than compensate for the risks they have undertaken. This is what separates ordinary people from entrepreneurs.
The income generated can be used in a variety of ways. It may be used to pay back the loans that the entrepreneur has taken on in order to start production. It may be used to pay both the principal and interest on any given financial liability such as a mortgage or a lease. The income can also be sued to facilitate the day to day running of the business in terms of buying raw materials, paying staff wages or repairing equipment.
The business owner might decide to use the income to build the business in terms of expanding his or her area of operation. They may update the methods and means of production or bring in new technology. This forms the process of building business equity. It is rather a long-term strategy in its execution because it seeks to keep the income generated in assets that show the value of the company rather than simply spending the money on other priorities.
How Income is used
Each individual business owner will have a set of priorities to which they operate. These priorities will determine the extent to which they re-invest the income that they receive from the business. Some might quite rightly argue that the only reason they entered a business was to earn money and that in any case the re-investment of that money will be exposing them to further risk. In such circumstances it would be unfair to insist that they take a long view even in the face of their own preferences.
Another factor is the expectation of the business owner as to when they will be exiting the business and in what matter. If the business owner expects to sell the business fairly quickly without adding much value to it, then income is the way forward. However if the original intention was to build up the business and sell it at a profit once the equity has grown, then the business owner is likely to consider business equity to be an absolute must.