If you own a business, it is very likely that you share a dilemma common to almost all small and mid-sized growing businesses and even many of the behemoths of the corporate world. That is, there is never enough cash to fund all the things you want to do, things that would either make your company (or non-profit organization) more successful or that would bring the company into compliance with some law, regulation, or industry standard. So, out of necessity, spending projects have to be prioritized based on a number of factors. The first of course is that projects that are required to meet some governmental or industry requirement or standard are typically non-negotiable & are at the top of the list.
For all other discretionary projects two factors stand out above the rest in determining how they should be prioritized; and both are financial measures. The first metric is “How fast will the project pay for itself?” and the other is “What does it offer in terms of a return on investment (ROI)?”. With regard to the first, the faster the better because it will start generating positive cash flow sooner. And for the 2nd metric, the higher the ROI the better because it becomes increasingly attractive as this measure goes up. Many great projects I have been associated with have had payback periods measured in months, not years along with ROIs far above the going cost of capital.
If the ROI on a project is less than what your money could earn elsewhere you should seriously consider putting it there UNLESS there is a compelling reason to invest in the project. That compelling case might be something like this. . . . I need to invest in project X that has a low ROI because it will enable me to then invest in project Y with a fantastic ROI. Or, I need to invest in project X to open the doors to a new market or to a new product line that I need to achieve my goals.
So now that you have prioritized your spending wishes, cash needs to be raised to fund the efforts. Cash can come from a variety of sources such as; your personal bank account, friends and family, “angel” investors, investment bankers, government programs such as the SBA, and banks. All have their pros and cons that you need to be aware of. And all abide by the 5 C’s of credit formally or informally. You need to be aware of them so that you can present the best possible case to a lender or investor when the time comes to talk turkey. Here they are:
Character – This is all about you and how likely others think you are to repay your debt on time. Your credit score is the most commonly used indicator of this metric.
Capacity – This, too, is all about you and it is your personal (or your company’s) ability to repay a loan. It can be measured in a variety of ways; net operating income and cash flow are two commonly used indicators.
Collateral – This is a set of things you and your company are willing to give to the lender or investor in case things go south with a loan. They include such things as a personal guaranty if it is a business loan and collateral that includes, among other things, intellectual property, real estate, facilities, equipment, furnishings, etc.
Capital – This refers to the relationship between what you (or your company) own versus what is owed. This is commonly called net worth. There are several standard measures of this including your debt to equity ratio, current ratio, etc.
Conditions – This last “C” refers to the current economic conditions in the country, your state and in your industry. If the economic condition in these areas is depressed, it will be harder to get your loan despite everything else.
So now you have some insight into the decision making process for deciding on how to spend your organization’s money and what it will take to get the funds you need. Here’s wishing profitable investing in your organization.