Avoid over-investment in capacity that you may not use.
ADAGE
Invest with Discernment
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RESPONSE
Avoid over-investment in capacity that you may not use. Be especially wary if you are facing long lead times and you have to add new capacity in large increments. If you must invest, try to invest in multiple-use assets. Don’t invest in order to improve your competitiveness as a commodity producer. You don’t want to compete on price. Invest instead to improve on quality. If you are investing in capital as a substitute for labor, make sure that labor productivity increases enough so capital intensity relative to sales does not increase. The improvement must not only pay for the cost of capital but also leave you with an incremental benefit. Consider partnering with someone else. Use their capital. The less of your own money you invest, the less return you need to obtain the same ROI. Nowhere does the idea of discernment apply more than in deciding how an enterprise invests its surplus capital. Especially if the surplus capital must be augmented with debt or equity in order to finance a capital project. Weigh costs carefully to ensure the benefit of going forward with hard-earned capital. Determine your objective before being lured by a lower price. Think short- and long-term return on investment.
SCRIPTURE
Matthew 7:24-27 “Therefore everyone who hears these words of mine and puts them into practice is like a wise man who built his house on the rock. The rain came down, the streams rose, and the winds blew and beat against that house; yet it did not fall, because it had its foundation on the rock. But everyone who hears these words of mine and does not put them into practice is like a foolish man who built his house on sand. The rain came down, the streams rose, and the winds blew and beat against that house, and it fell with a great crash”.
QUESTIONS
How do the Scripture(s) apply to the business adage?
Should you ever undertake a capital improvement if it requires bank borrowing? Explain.
Should you ever use equity investment to pay for a capital improvement? Explain.
Are partnering and joint ventures better options to debt and equity when evaluating a capital project? Explain.
Is your capital expenditure plan a vanity play?
DOWNLOAD
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