Cash Investments are Critical for Growth – Make Them Wisely

Cash investments are critical to a company’s growth.   Cash investments can lead to increased revenues and/or decreased costs, leading to higher profits, and growth.  So, decisions about what investments to make are critical to your company’s future.

This blog suggests using a quantitative approach to making decisions about how to invest cash for growth.  Think in terms of the affect that the investment will have on profit by increasing revenues or decreasing costs.   Quantify these changes in revenues and costs in dollars and than divide these changes by the dollar amount of the investment made.  The result will be the return on the investment.  Have in mind a minimum return on investment percent (e.g. 5%, 10%, or greater) that you will required before you will make the decision to invest.  Use your financial statements for support in making investment decisions.  Consider each line item on the profit and loss statement for where increases or decreases can result from investments.   Accept that too low a return is not worth the effort.  Rather look for other investments with sufficient returns.

Return on investment calculations need to be based on reasonably accurate estimates of gains (the increased in revenues less costs) divided by reasonably accurate estimated costs.  Too often the return on investment determination is flawed, because the estimated gains and costs are incorrect, leading to a wrong rate of return. The return on investment concept for decision making should only be used when there is a clear amount of investment and a quantifiable gain and cost that clearly and unambiguously results from the investment.  Otherwise too much uncertainty exists about how the investment correlates with the gain.

Accounting systems such as QuickBooks and QuickBooks Point of Sale can be used to determine the return on the investment for each item of inventory that is sold.  Reports in these software packages can show total costs (investments) and total profits (gains) form the inventory item sales.  From this data, investment returns can be calculated showing those inventory items that are most profitable.   Investment return percentages give a more pronounced picture of the differences in gains from sales than gross profit margin percentages and, in that respect, can be useful for decisions related to inventory investments.

Besides inventory investments, investments in creating new products or services, in marketing, in adding personnel (where the personnel can be clearly tied to increased revenues, such as sales personnel), and projects with clear, directly-related costs are likely investments for return on investment decision-making analysis.  Remember, be as accurate as possible in estimating these gains (benefits) and the costs of the gains. And implement only the investments with sufficient returns.  Where limits on investments exist, choose the investments with the best expected returns.

Other factors need to be considered in addition to the percentage rate of return of an investment, not the least of which is the risk associated with the investment failing to meet the expected gain.

Try to keep in mind that computing investment returns in your business should be straight forward, not unduly complicated and complex,  and fully understandable by you.  Although good estimates of gains and costs are important, absolute accuracies are not so critical such that determining the estimates become a lengthy, complicated, painful, and costly exercise.  Rely on good judgments and common sense in estimating the gains and costs.   Whether the return is 15%, higher, or even lower, the decision to make the investment in your business will help your business.  What is important is to be in the right ball park, e.g., the result that the return is above your lower limit for a return, rather than in the wrong all park, meaning there is no return, and therefore a bad decision.

Lots of information can be found on the Internet about returns on investments, their calculations, and other factors about there use.  Finding this information is relatively easy, and from the information you can begin your education about using returns on investment for decision making.  

Keep Your Eye on the Competition

A critical function in your small retail business is to know and analyze details about your competition.  Such knowledge and analysis can help you make better decisions so that you can become more successful in attracting the customers you want.

Here are a few details that you should know about your competitors:

1.  Know your competitors’ stores.  What signage is used?  How are the signs used and are they successful?  How are shelves designed and used?  What is the feeling in the store derived from such attributes as lighting, flooring, walk areas, entrance and aisle space, wall coloring, and decorations?  What are the store hours?

2.  Know your competitors’ check out procedures.  Is the check out efficient?  Do long lines accumulate?  Why?  Are the cashiers friendly and polite, do they smile, make welcoming comments to the customers?  What check out and payment technology is used?

3.  Know what products are sold, their prices, the stores’ discount policies, and loyalty and coupon programs.  Analyze these policies and programs for what they are trying to accomplish and how.

4.  Know the marketing done by the competitors.  What newspaper, radio and other media are used?  What brochures, pamphlets, and other documents are available for distribution?

5.  Know who the suppliers are.  Hang out (or have someone else hang out) around the stores to take notes on suppliers.  Once suppliers are known, research the suppliers, e.g. at their websites and at other sources, to compare competitors' suppliers to your own.

6.  Know the competitors’ internet presence.  Do competitors show ads when a search is done for such a business in your market area?   Do the competitors show up on Google and Bing local map listings and on Superpages, Yellowpages, and other local listings designed to help the searcher find businesses?  Are the competitors’ websites easy to navigate, to find contact information?

7.  Know the customer traffic at the competitors’ stores.  Hang out (or have someone else hang out) around the stores to take notes on the customers – the numbers, ages, genders, social levels.  Take notes on what customers seem to be buying, the quantities, and when.

8.  Know what customer services are provided.  Are employees on the store floor to provide assistance?  Are employees friendly and helpful throughout the stores?  How many employees are there?  Are there too many, not enough?  What employee turnover exists (are help wanted ads appearing in the local media)?

9.  Ask your employees, suppliers, family, and friends what they know about the competitors, what their evaluations are of the competitors, what they might suggest about how the competitors compare to your business.

10.  Use your local library and the internet to find information about the competition.  Many local newspapers now have been digitized so that they can be easily searched by keywords (e.g. competitors’ names).  Past information appearing in newspapers could be useful.

In the knowledge and analysis from the above, compared what you discover to your business situation.  Think about the comparisons and how what you now know can be used to improve your situation.  Think about how you should respond to what the competitors are doing, what they might continue to do, or implement, that will affect your situation.  Are the competitors not providing something that you could provide, or provide better, to gain customers?

Record what you learn and your conclusions and keep for future use.  Update what you have recorded periodically, e.g., at least once a year.  Think about how complete and reliable what you discover is and what you can do to gain more completeness and insights.

Consider hiring a sub-contractor for help in gaining knowledge, information, and analysis about your competition.  Independent information professionals specialize in just such tasks.  A good source for finding such a professional in your area is the Association for Independent Information Professionals.  Click here to go to this association’s directory of information professionals.

The well-known Harvard Business School Professor, Michael Porter, has gained a world-wide reputation on his conclusions about what drives competition.  You can read some of what he a writes by clicking here (PDF file).  His insights can be thought-provoking for you.

The British Newcastle Library has written an article about questions to ask about your competitors.   Click here to read this article (PDF file).  Troy A. Festervand and Jack E. Forrest at Middle Tennessee State University outline a program related to knowing your customers.  Click here to read this article (PDF file).

Important decisions you make are best made when informed by good information and analysis.  Some of your most important decisions will be about how to run your business based on what the competitors are doing.