In most businesses the largest gains are in pricing, margin, debtors and owner time, inside the business as it already runs, and nobody has measured them yet.

What the Value Gap is

It's the cash and performance the business you already run could be producing now and isn't — from pricing that hasn't kept pace with costs, to cash sitting uncollected in aged debtors, to time and margin quietly leaking out of processes nobody's looked at in years. None of it shows up as a single line on a set of accounts.

Measuring it shows where the gap is, how large it is and what to fix first. Most owners sense that things could be better without being able to say where, by how much, or what to do about it first.

Where the gap usually is

The Value Gap tends to cluster in the same handful of places. Pricing that was set years ago and never revisited against rising costs. Cash management that reacts to problems instead of forecasting them. Time spent by the owner on tasks that should have been delegated long ago. And missed opportunities — services you could offer, customers you could retain better, margin you could protect — that simply haven't been looked at properly because nobody's had the time or the framework to do it.

It is usually three or four smaller changes, such as a pricing increase or faster follow-up on overdue invoices, that together make a large difference to profit.

The gap grows gradually. Prices fall behind costs and processes slow down over several years, so by the time anyone measures it, the gap is usually bigger than the owner would guess.

Worked example: a £600,000 trades business

The business below is illustrative, not a client, and the figures are round to make them easy to follow. The structure is one we see often.

A trades business turning over £600,000 a year, at a 42% gross margin, with £210,000 of overheads:

  • Gross profit: £600,000 × 42% = £252,000
  • Less overheads: £210,000
  • Net profit: £42,000 — a 7% net margin

Four changes follow, all made with the existing customers.

1. Price. Last reviewed three years ago. A 3% increase on £600,000 is £18,000. Because the costs of delivering the work haven't changed, essentially all of it lands in net profit. That is a 3% price move producing a 43% increase in profit. This assumes volume holds. It usually does at 3%, but test the assumption on your own customer list.

2. Gross margin. Two points of recovery. Quoted jobs that overran, materials bought at list because nobody renegotiated, discounts given by habit. Lifting 42% to 44% on £600,000 is another £12,000.

3. Debtor days. Say trade debtors sit at £112,000. Debtor days are (£112,000 ÷ £600,000) × 365 = 68 days. Getting that to 45 days means debtors of £600,000 ÷ 365 × 45 = £73,973 — releasing £38,027 of cash that is currently sitting in other people's bank accounts. This is cash rather than profit.

4. Owner time. Six hours a week on work that someone else could do at £14 an hour costs about £4,032 a year to hand over — and buys back 288 hours. Whether that is a good trade depends entirely on what you do with the 288 hours.

Add the first two together and net profit goes from £42,000 to £72,000 — up 71% — with £38,027 of cash released alongside it, which is the Value Gap for this business.

Find your own number this week

To start, pull five numbers out of your bookkeeping and write them on one sheet of paper:

  1. Gross margin %. (Turnover − direct costs) ÷ turnover × 100. Compare it with the same period last year. If it's fallen, that's the gap.
  2. Debtor days. (Trade debtors ÷ turnover) × 365. Anything over 45 on 30-day terms is cash you have already earned and not collected.
  3. The date of your last price increase.
  4. Customer concentration. What percentage of turnover comes from your top three customers? Above 40% you are exposed if one of them leaves.
  5. Your own hours. How many hours a week do you spend on work you could pay someone £14 an hour to do?

Those five numbers take about an hour to find and will point at your biggest gap on their own. Our five numbers every owner should know goes through each one properly, and the Value Gap worksheet gives you somewhere to write them down.

How the free session works

Our Your Business Roadmap session is a free 60-minute session where we work through your numbers using our Value Gap Calculator to find where cash is being lost and where performance can improve.

You leave with a figure for your Value Gap, where it comes from and what to work on first.

Afterwards you decide whether you want any further help from us.