Capital Allocation In Uncertain Times: Where Should You Really Be Investing
by Michael Reimers, Director of Accounting, Eva-Last Distributors
“Over time, the skill with which a company’s manager allocates capital has an enormous impact on the enterprise value” – Charlie Munger
Capital allocation may sound simple enough as the decision to direct scarce financial resources towards high-return opportunities rather than simply fuelling growth. However, in this volatile business landscape even the best laid plans and forecasts can be derailed by unforeseen project delays and demand volatility. Cashflow crunches and decreased profit margins ultimately impact the value of your company.
So, where should you really be investing your capital in these uncertain times?
For Eva-Last, as a manufacturer and distributor of advanced composite building, a significant portion of our capital is invested in stockholding, either at the factories or at our Eva-Last distribution hubs. This strategic investment serves the dual purpose reducing lead times to supply and stock risk mitigation in established territories, while facilitating market penetration into broader regions.
Of course, the decision on where to deploy funds must be aligned with your strategic objectives and revenue targets. Today, modern cost accountants and supply chain managers need to have an eagle’s eye-view of daily cashflow against sales revenue and operational costs to monitor – and adjust – the efficient utilisation of cash resources against targets.
Stock on hand is necessary to drive year-on-year growth to achieve both market penetration and the ability to take advantage of opportunities that may arise with a short turn-around requirement. However, stock-days and delays have a significant impact on cashflow, risk, production and profitability.
Eva-Last’s is largely able to forecast demand and manage supply according to the distribution territories history and cyclical buying patterns. By aligning our production and regional warehousing with the seasonal buying patterns of both the Northern and Southern hemisphere distributors, we achieve better long-term visibility and can plan our procurement and delivery based on actual, or anticipated, orders.
High-volume product lines with strong stock turnover of between 90 – 120 days deliver smoother revenue flows, while certain high-margin products can be held for up to 150 days to avoid stockouts in times of unprecedented demand. In addition, our strategically positioned distribution hubs are decentralised to marry quick supply and demand while minimising transport costs and protecting against unexpected production delays.
But it’s our sophisticated systems that allows us to manage our stockholding region by region, against revenue targets and returns. These systems aggregate all inputs from sales histories and forecasts to customer orders and project timelines, invoices to payments, enabling us to optimise our capital allocation across our product lines accordingly. We can monitor our performance in real-time, or on a monthly, quarterly and annual basis and be as responsive and efficient as possible.
Being able to identify which high-volume product lines we should carry to meet orders, and which high-margin products to stock helps avoid potential stock-outs and lost sales. Aside from investing in advanced resources to monitor product availability and production pipelines, streamlined procurement plans with sales volumes help provide complete transparency, prompting us to restock whenever necessary. This ensures we meet customer expectations and lead times, minimise stock-days and unnecessary warehousing risk while maximising return on investment.
Conclusion
Capital allocation for stock is a delicate balance between managing product availability and maximising return on investment. Astute financial managers can add tremendous value by allocating adequate resources to stock investment, while maintaining and monitoring the cashflow of the company, but ultimately contributing to the relationship of trust between the manufacturer and its distributors across the globe, with the ability to deliver on-time and in-full, every time.
