A sample of recent survey results published, showed that finance professionals will be looking in the near future, to stimulate company growth, after years of focusing on cost containment, reducing debt and risk management.
– “79 percent said they would, in part, reinvest in their businesses and/or fund acquisitions using their cash holdings.” (Accenture 2013 CFO Survey)
– “80 percent of CFOs plan to spend liquid cash on hand on investment in operations and growth initiatives, further emphasizing the importance of operations to many companies’ overall business strategies, as well as the CFO’s involvement in the execution of those plans.” (Korn/Ferry 2013 CFO Pulse Survey)
-“ CFOs say their top uses of cash will be investments in organic and inorganic growth – well ahead of alternatives like funding operational improvement efforts and holding cash as a risk hedge.” (Deloitte 2Q13 CFO Signals ™ What North America’s top finance executives are thinking – and doing)
Statistics support the notion that since the “Great Recession,” capital expenditures have not yet recovered. According to the US Census Bureau’s Annual Capital Expenditures Survey, from 2008 to 2009, capital expenditures declined 20.63%. For the following two years, increases have been minimal, 1.38% from 2009 to 2010 and 10.84% from 2010 to 2011. While this survey is not all inclusive, it serves as a good proxy of activity for all companies and may point to pent up demand by businesses to invest in profit generation activities.
From a purely finance perspective, when investing capital to achieve growth, only commit capital to those projects that exceed the firm’s cost of capital. But the piece that is very difficult to quantify is related to the disruption generated that accompanies a change to the organization.
Broadly, growth comes from increasing the current products and services offered. The difference comes in to play in how that goal is achieved and executed –
-Expansion of current capacity (least disruptive), to drive down the cost of production and increase sales capacity. In this situation, current policies and procedures and risk mitigation measures, need not change. Profit growth is essentially related to driving down expenses through productivity increases. The effects of changes in this area may be realized within twelve months.
-Expansion of a related product or service (minimally disruptive), that compliments your current offering. This approach may require the addition of headcount that are experts in the new product or service. Current policies and procedures and risk mitigation measures, may need to be enhanced. This approach may lead to incremental profitability increases. The effects of changes in this area may be realized within twenty-four to thirty-six months.
-Merger/Acquisition (most disruptive) associated with the integration of the current organization with the acquired organization. This approach may lead to a sharp increase in profits, if done correctly. In addition to increasing capacity, this approach will serve to remove/eliminate a competitor. The effects of changes in this area may be realized within sixty months.
Prior to the implementation, perform a rigorous review and analysis – set a plan, manage the investment approach, validate assumptions, and modify if necessary. Timing required and profitability gained will be directly related to the ability to Execute on the established plan to achieve the projected financial results.
Every business should constantly consider options to grow or risk losing market share to a competitor that has invested in growth.
How will your organization grow in the next 24 months?© Copyright 2013 Regis Quirin, All rights Reserved. Written For: CFO Tips - What you need to know, to be a CFO TODAY!