Situation: A CEO is looking at a significant investment in capital equipment. Being considered are not just the cost of the investment, but the opportunity cost of not making the investment and the impact that this will have on the business. An additional consideration is the business mix of the company and whether to shift focus from low volume/high margin to low margin/high volume products. What tools have others used to assess these trade-offs? How do you fund growth strategically?

Advice from the CEOs:

• Review the company’s approach to contracts. It may be desirable to revise the approach in light of the new objective. The switch from low volume/high margin to low margin/high volume products impacts not only production but also marketing, sales, finance and accounting.
• Price some early new contracts below market to finance the additional equipment expenditures, as well as to test market response to the new offering. This will help to identify additional adjustments that are needed for the new approach and offering to succeed.
• Structure the financing options for equipment purchases creatively, for example by allowing for participation by customers and investors.
• Watch changes in working capital at all times and keep it under control. Working capital is a commitment of resources just as is buying equipment or facilities.
• Consider all resource commitments as investments, regardless of the way the accountants deal with them as in expensing vs. capitalizing these investments on the balance sheet. For example, a marketing program is an investment even though it will show up as an operating expense. Make sure that this can be justified in terms of future cash flows expected.

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