Staff writer AccountingWEB
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How do you invest for growth while controlling costs?

18th Oct 2017
Staff writer AccountingWEB
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Recently McDonald’s chief finance officer John Park went on the record about the fast-food giant’s approach to managing its cost base while still investing for growth.

For every finance director in every boardroom, Park's dilemma will strike a chord. So how have others approached the challenge of balancing these twin business and financial tracks? What are the financial decisions that need to be taken for companies to thrive rather than stagnate; to grow, not shrink?

Clearly every business will face its own particular dynamics around finances and around growth opportunity, but there’s plenty to learn from those who have been there and done it before.

The competition question

Sam Boothroyd is a small business coach and former finance director in several businesses. These days he works on this kind of strategy with others, drawing on what he’s learnt along the way doing it himself.

“It’s a fascinating question, because it gets to the heart of business strategy and financial acumen,” says Boothroyd. “For example, it’s a dynamic that you constantly see in manufacturers that face the ongoing question of how much to invest in upgrading machinery and in new technologies”

A few years ago, Boothroyd was working with a printing business that faced just these questions.

“Every three months, there would be a boardroom discussion over whether to invest in new kit or to save the cash for a rainy day.

“Department heads in the business would always be pushing for investment, in an industry where the cycle of upgrades is constant in order to stay competitive and offer the latest thing to customers.”

In such a world, the question of how to judge which investments should be made and which rejected was never easy, says Boothroyd.

“You look at the return-on-investment timeframes, on financing options and more. Half the projects would tend to be dismissed by the MD, with the remainder being explored further through probability and payback analysis.”

The other issue for many businesses is how there is reputational risk in not keeping up to date. If the competition can offer services and products because they have invested and your business hasn’t, that can really have an impact, even if in many industries it’s not so clear-cut as that.

Contactless dilemma

Another business Boothroyd worked with several years ago found itself debating contactless cards and whether they would take off.

“These are big investments for a business to make, and market research and benchmarking won’t always be enough – or be an affordable option.  Sometimes companies have to ask as many of the right questions as they can – and then make a call.”

In this example, the impetus was coming for a customer of the company – Barclays Bank – and the decision was taken to jump in, with the prospect of losing Barclays as a customer otherwise. But it wasn’t a call that was easily made.

Keeping cash in the bank

For many business owners, there is a tendency to hold onto cash to give the company a buffer against a change in fortunes.

Finance directors often see things differently, however. Many will argue that cash in the bank isn’t working for the business and needs to be invested for growth.

Boothroyd makes the point that scrutinising opportunities and applying methodologies are useful tools to make decisions, but very often the best place for businesses to start is to invest in the proven opportunities rather than speculating.

“The finance director doesn’t want to be reckless, you see. The point is to invest in stable, proven opportunities rather than leaving money to do nothing.

“If something is proven in a consistent way – like marketing spend on Facebook ads or Google ads, say – then there’s a good argument for scaling up activity. If £10,000 of investment delivers a multiple of that in terms of profits from new business, why not invest £50,000 or £100,000?

“The other area where an investment can look like a surefire bet is for a manufucturer with a production bottleneck. If the demand is there and pent up, new kit should immediately deliver in a way that is measurable.”

Opportunity is also knocking

Martin Mellor, founding and managing director of Mellor Financial Management, adds that it is often when companies are bought and sold that investment and cost control are under particular scrutiny.

“Deals often come with a lot of complexity attached, but they are also a golden opportunity. I worked on a merger of two business where there was a huge opportunity to make savings on the property estate of the newly enlarged business. That was part of the rationale for the deal, in fact.

“But the point is that it shouldn’t take a deal or a big event to prompt businesses into meaningful action. There are always growth opportunities and cost savings to be made, whatever else is going on.”

Mellor says companies should ensure they conduct regular reviews of property contracts and also not be afraid to shop around for many services they are buying in.

“You don’t want to be unduly disruptive, but there very often is big money in play. That business that rationalise its property estate, for example, saved £8m over five years, while maintaining enough extra capacity in the business for its growth trajectory.”

Turnaround? Try to avoid

Mellot contrasts a proactive approach to costs and to opportunities with what happens when companies let things drift and run into trouble.

“Once a business has to get a turnaround specialist on board, the opportunity to be strategic is passed. For a company in trouble, a turnaround guru will strip out costs to improve margins in the short terms, but cutting like this imposes constraints on future growth and future profitability. It’s what you want to avoid but grasping the nettle now.”

Public sector, commercial approach

Mellor also makes the point that a commercial approach to contracts to keep a lid on costs applies just as well to the public sector.

“I’ve worked with the Ministry of Defence on its procurement practices and supplier contracts, for example, and seen the benefits that flow from making supply contracts work harder.

“With the MoD, it was about playing to the organisation’s strengths as a good long-term bet for the supplier, with a guaranteed book of work flowing. It gives an organisation great leverage on contracts, but that wasn’t something MoD had fully embraced. It had been working on very relaxed terms with its suppliers and needed to reset things on better terms. The supplier was still happy with the business, but the terms were more equitable.”

First steps

Mellor and others make the point that any business, large or small, can get more analytical about costs. What costs are fixed and why? What spend is discretionary? What opportunities need to be taken seriously and explored fully?

“Even if an intervention only saves a small amount of money, that can have a big impact, remember. The reinvestment of that money could deliver great things for a business that had been constrained in its finances, for example.”

In short: go for it

The message, says Mellor, is simple at heart: don’t stagnate, and don’t impose artificial limits on the business.

“If you aim for 5% growth in a year, you’ll never get 100% growth. If you think big, within reason, you can go further faster. Be realistic in target-setting, sure, but equally don’t hold yourself back. Many opportunities have a shelf life and need to be grabbed.”

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By sca1een
28th Nov 2017 13:41

Thanks for the interesting article. My thoughts on the topic are that first, one has to ask where the monopoly power comes from. In our era the market domination of firms like Apple, Microsoft and Google is due to the fact that their technological circumstances confront them with steeply diminishing marginal costs. In such a market the firm that is first of the mark to get market share is usually able to get a monopoly position (or at least will become part of an oligopoly. ) It is true that, once the monopoly is established, they can charge monopoly rents, which are independent of their investment level (hence the "mountains of cash" they sit on). But there is always the Abroad, where competition still exists. We see that these American corporations do invest abroad. But that is a question of moving productive capacity to places where pay is relatively low in relation to labor productivity. The investment therefore does not have to be in labor-saving means of production, as it would have to be in the US, where labor-productivity and pay are both high. In other words, faced with the question where best to invest and in what, these corporations opt for investment abroad in conventional investments, instead of investing in the US in labor-saving investments. This all applies, of course, to the industrial sector, where material goods are produced. The story is different for the service sector, which is growing relatively to the industrial sector. For long investment in labor-saving means of service delivery was not an option, but this is about to change in a revolutionary way ("the coming revolution in retail"). It will be interesting to see whether we will see the same tendency to market concentration in services, that we have seen in industry. And what will then happen to investment in the service sector.
Scarlet Kleen
writer in finance and management

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