Is your capital investment planning PROACTIVE or REACTIVE?
Our experience has been that the majority of SME businesses undertake their capital investment (capex) planning on a reactive, needs based basis. The need to meet growing capacity demands, the need to replace ageing equipment, or the need for additional facilities may be pressing demands and require near-term responses. Alternatively, the need for better systems or the goal of reducing costs through automation or other means may seem more optional but are likely to improve business performance. Many SME businesses don’t commence the review and planning processes until the investment is planned to be undertaken in the next 12 [...]
How important is long-term capital investment planning for your WEALTH ENGINE?
Are you proactive or reactive in your planning? Having a long-term strategic investment plan is a key element of creating wealth. Are you likely to create a high value business by responding to pressing needs? There are many competing demands for capital investment in every business. These include: The need for more capacity The need to reduce costs of production/delivery (e.g. automation) The need to have a deeper knowledge of the drivers of profit The need to create new product/service lines The need to enter new markets The need to make acquisitions If these demands are addressed only when [...]
Cash is not King when you’ve got your WEALTH ENGINE
What you are told Anyone who reads business advice has heard the saying “Revenue is vanity, profit is sanity, but cash is king”. You will be told “Cash is King” time and time again. Political campaigns have been condemned because of the use of “three-word slogans”. This is a three-word slogan. Yes, there is some merit in it. But the danger is that it will cause management to place too much focus on the short-term management of cash reserves. The reality We need to reinforce the reality. Cash is not King. It is the complete opposite. It is your [...]
Have you planned for working capital growth in your WEALTH ENGINE?
Why working capital will grow If you are a growing business, you will be experiencing increasing demands to fund higher levels of working capital. Some businesses have a higher working capital burden than others. For example, manufacturers may carry high levels of inventory as well as high levels of receivables. Service companies will generally have a lower level of working capital, but it is still a funding issue. The ceefo Wealth Engine program forecasts working capital growth over a 5-year outlook period. Our clients are always surprised at how much additional capital will be required to fund this growth. [...]
What management style is needed to manage your WEALTH ENGINE?
Your wealth engine We refer to your business as a WEALTH ENGINE when it can meet two critical criteria. The first is achieving a high return on equity (ROE). The target will be different for different styles of business depending on how capital intensive the business is and its risk profile. The other criterium is the reinvestment ratio (RIR). This is the proportion of net profit after tax that is reinvested into the business. Once again, the appropriate proportion will vary depending on a range of factors. The key requirement is that a high proportion of profits are invested [...]
Your business WEALTH ENGINE – do you know how much you have invested?
Business as a wealth engine is a simple concept. You have invested capital in your business (equity or net assets). You get a return on your investment from the business’ profits. This is represented by your NPAT (net profit after tax). Your return on equity (ROE) is measured as NPAT/Equity. You will take some of the profits out of the business (dividends or distributions) and you will reinvest the remainder of the profits into the business. This increases the amount of capital invested in the business and then requires a higher NPAT to maintain the previous return on equity. [...]