When things are straightforward, it is easier to make a decision. When things are stable, they tend to become more predictable. Alas, when things are predictable, confidence to invest rises. Now, we know that there is no such thing as certainty in business. Most decisions are based on gut if enough information suggests to you that it is worth doing. Most investments get the go ahead if the outcome is relatively certain. Clearly, we are today living in a world where certainty can no longer be taken for granted. We are living through an unusual period of instability – be it Brexit, COVID-19 or a trade war. Business leaders must still make important decisions and guide their empire through choppy waters. So, today we discuss what can help in deciding on business investment during economic volatility.
Deciding on business investment
The first step is to decide what, if any, investment options you have in front of you in your role as a senior leader. This could be any one of the following (this list is not exhaustive):
- Plant & machinery
- Premises
- IT & software
- Personnel
- Inventory
- Acquisition
- Advisory services
- Research & development
How these business investment options manifest themselves in your consciousness could be via several channels (this list is not exhaustive):
- Your experience
- Networking, peers and business groups
- Learning opportunities
- Direct reports
- Other employees
- External advisors
- Competitor actions
- Government incentives
- Supplier requests
- Customer requests
It is also possible that some business investment options are not ‘signposted’ to you. Employees may have little or no channel, motivation or responsibility to suggest or enact change. Direct reports may tell you what you want to hear. Customer requests may appear conflicting. Supplier requests may not be in your interest. You may not notice competitor actions or doubt the impact of them until it is too late.
The second step is to validate and vet the business investment options. This, of course, is considerably trickier during economic volatility. The quality gates may be higher, the timescales shorter and return on investment demanded greater than before. For example, a 5-year time horizon is harder to decide on than a 6-month return. Similarly, a £10k investment to gain £100k profit is more attractive than £250k for £500k profit.
Economic volatility
We often say that, “You don’t know what you don’t know”. Many senior leaders are experts in their field, highly knowledgeable about their business and determined. Crucially, whatever initiatives and investments they consider, they still have a business to run. As one leader recently described, “You can’t let your ‘to-dos’ distract you from your ‘must-dos’ or you will fail”. Executives must grow their business. They must ensure that there is enough cash to pay everything that will come due. They must navigate uncertainty and understand all of the potential options and opportunities open to them.
Economic volatility is a major distraction and it undermines business confidence. Moving interest rates, fluctuating inflation, unpredictable tariffs and more simply dampen confidence. In addition, they cause your customers and suppliers to face similar dilemmas. This is mainly because there are more variables to consider when making any decision. In addition, flexibility to respond to market changes introduces some inefficiency. Maintaining higher inventories or holding stock at ports provides a buffer against shocks but reduces profit and cashflow. The balance is delicate as volatility increases. However, growth must remain a focus, the search for opportunities must continue and efficiency optimised.
Business growth for investment
The best business investments are those that lead to growth or halt a decline. As one leader told us, “We have to grow every year because our costs increase every year”. It really is that simple if we want to standstill in real terms. However, if we want to think beyond standing still, we need to find new markets, industries, customers, products and efficiencies. Somehow, throughout periods of volatility, senior leaders must find the time to focus in these areas. While it is tempting to tighten the belt and stop all non-essential expenditure, you cannot cut your way to greatness. Business investment remains essential, even when the areas that it competes against grow louder.
As a simple example, a struggling business cuts all discretionary expenditure after a bad start to the year. Divisions or subsidiaries stop all capex investment and cease to submit business cases to ask for budget. They then budget for the must-haves that they didn’t get in the current year. The following year, due to economic volatility, the business has a wobble in Q1 and again cuts any non-essential spend. The board appears to have taken decisive action to protect EBITDA, cashflow and dividends. Shareholders rejoice at the attempt to keep cash inside the business to give to them. All is well. Or, is it? That is now 2 years with no capex investment and few business cases for innovation, efficiency or growth.
Summing up deciding on business investment
There is never a good time to invest when things appear uncertain and volatile. There are too many variables and pressures. However, if you don’t make the time and allocate some budget, a 2-year gap, as in the example above, is a lifetime in business. During those 2 years, your competitors may have leapt forward, the market may have moved etc. Your equipment may be nearing obsolescence and your cost base may be larger than it could have been. Worse still, you have let growth opportunities pass you by and stifled innovation to increase a competitive advantage. As Theodore Levitt once posited, this is myopic and short-term in focus. Sure, we understand the financial pressures today, but the businesses who bounced back strongest from crises continued to invest in growth and their future.
If you would like to speak with our team, simply reach out to us via our website.
Alternatively, why not email the team with your inquiry today.
Finally, why not check out two further articles on resilience and decision-making.