One of things that intrigues me is the number of businesses that do not know how to use the equipment and technology that they have invested in. Now that's a controversial statement I know, so let me explain.
When I say that they do not know how to use their investment I do not mean at a technical level. Sure, they know how to turn items on, fill them with fuel and operate them within the systems in their business. What they don't understand is how to use their investment to generate the best possible return for their business.The definition of an investment is the investing of money or capital in order to gain a profitable return. That is a pretty simple definition. So the conundrum is why do business owners invest tens and sometimes hundreds of thousands of dollars into assets, in some cases incur significant financing charges and depreciation if the assets do not generate a profitable return?
So many times I have seen businesses invest significantly to obtain productivity or quality gains only to consciously and negligently reduce the value of their products or services and therefore their profit. So how does this happen?
Take a service industry that invests in a tool of trade that improves their productivity by 25% leading to every job being completed 25% faster. This same business charges their customers on a flat hourly rate (normally determined by outdated but generally accepted industry norms – a topic for another day) regardless of the project. Notwithstanding that this business can do more clients jobs over the space of the year the have by adopting this model decreased their revenue and therefore their profit by 25%. Smart investment? I don’t think so.
So what should they have done? Simple. By agreeing the value of the job with the client before they started and then using their investment to complete the job 25% faster they increase their profitability instantly. This profit increase is compounded when this business uses the additional time to win new customers and do extra work under the same model.
The same principals apply to product based businesses. The quality gains made through the use of technology should be appropriately priced into the goods and be marketed accordingly.
So the final question is, do you know how to use your business investment?
Written by Andrew Mattner
Hattam McCarthy Reeves
Chartered Accountants and Business Advisers
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