CAPITAL ALLOCATION

CAPITAL ALLOCATION

At a fundamental level, business managers need to be able to do two things well. Run the operation efficiently, and redeploy capital effectively. For private companies, the latter is primarily done in three ways.

1). Investing in existing operations

2). Acquisition of other businesses.

3). Repayment of debts.

The sequence of these three elements will vary for businesses at different stages. Market conditions are highly fluid, therefore there is no perfect formula for capital allocation. I can only comment on my experiences during the start-up phases.

The first measure of effective capital allocation is stabilizing monthly and quarterly revenue. Without doing this, every decision you make will be like standing at a roulette table hoping for the best. Downside protection is virtually non-existent because you have zero margin for error.

So, how do you go about making revenue predictable? Well, there are many answers to that question and I do not claim to have the perfect one, however, I do have one that would have saved me a lot of hard aches. At the end of the day, the lifeblood of any business is the lead-flow. Both in quantity and quality. Maximizing this lever should be your number one priority. In other words, the biggest most predictable bottleneck for new businesses is the inflow, not the outflow.

Find a channel of marketing that gives you the best return on capital and time and invest in it - heavily. Once you have a consistent quality pipeline built up, your revenue should stop "kangarooing" so drastically day to day, or week to week. This will allow you to start thinking more strategically. You can look at working on the business instead of being forced to work in the business.

At this point, you can also now consider investing in yourself, to learn new, more efficient tactics from people who have already been where you are. A word to the wise. Do not do this before you have at least 3 months of operating expenses in cash reserves. Many internet marketers and so-called guru clowns will try to convince you that your precious cash would be better spent with them rather than invested in making your cash flow durable. I advise in the strongest possible terms that you ignore them until you can afford to lose the cash.

I will close, not by emphasizing the absolute necessity of having competency in this area, but in the root character trait for that competency. Patience. The inability to be patient, wait, and think objectively has destroyed a lot of potential companies. Don't let yours be one of them.