Most business people equate growth with success. Growth shows that the market likes what we offer. It also allows us to add resources, thus building a stronger foundation. Growth usually leads to increased profit, which rewards our shareholders and improves our access to capital.
Growth, however, isn’t free. It comes at a cost, which is called investment. The investment is in people, systems, and capital. The capital portion consists of tangible assets, intangible assets, increased costs, and working capital. The working capital component is often neglected because it can be counter-intuitive. Why doesn’t my cash flow keep up with my revenue and profits? It’s because investment in working capital (accounts receivable, inventory, and other assets) absorbs cash. This is a direct cash investment similar to purchasing equipment.
Businesses supplementing organic growth through acquisitions should be prepared to invest significantly in intangible assets. A 2015 study by Ocean Tomo* revealed that 84 percent of the market value of S&P 500 companies was intangible assets. That’s an investment that can’t be overlooked.
Investing in Growth
There are two philosophies of how to invest in growth. The first is a minimal approach, which defers investment until after growth has occurred. It’s conservative because the investment is made only when growth happens. This leads to a higher level of profitability than the more aggressive approach. The detriment is that our business must operate at full capacity, often stretching resources which can cause a strain. Over a prolonged period, the stress involved can cause our business to underperform.
The other approach is heavy investment. This is where investment is made in anticipation of growth. This is often seen in ambitious start-ups with investors willing to tolerate operating losses with the hope of future growth and profitability. The benefit is that this approach enables a high rate of growth with a manageable strain on our business. The down side is financial losses as well as the potential for misdirected investment. The anticipated revenue may not be as great as expected.
Hitachi Business Finance exists to support the working capital financing needs of growing businesses. We leverage accounts receivable, inventory, and equipment to replenish cash that’s been invested in growth. We help our clients anticipate their financing needs so a lack of capital doesn’t derail their growth.