I was recommended a great book to read by my friend Loren Carlson (Chairman of the Boston based CEO Roundtable) – The Outsiders by William N. Thorndike, Jr. subtitled, Eight Unconvential CEOs and Their Radically Rational Blueprint for Success. So you thought Jack Welch was successful? These eight blow his performance away! I’ll let you dive into the book when you get a chance but the key theme from the book behind the success of these great leaders is Capital Allocation.
Capital allocation includes the know-how surrounding the buying back of shares, acquiring companies, issuing dividends, selling assets and taking on debt. As Warren Buffett explains’ “The heads of many companies are not skilled on capital allocation. Their inadequacy is not surprising. Most bosses rise to the top because they excelled in an area such as marketing, production, engineering, administration, or sometimes, institutional politics. Once they become CEOs, they now must make capital allocation decisions, a critical job that they have never tackled and that is not easily mastered.”
Now the book is focused on some large companies but there is a great lesson here for all entrepreneurs. As an entrepreneur leading your $5m to $75m business, ask yourself some questions to test whether you are even considering key capital allocation issues.
Capital Allocation Key Questions
- Are you hanging onto non-core subsidiaries that don’t support your unique core business for sentimental reasons? Could you sell those subsidiaries quickly to their management?
- Should you consider the acquisition of smaller competitors to add key skills, accreditations, IPR to scale your business?
- Is your management team incentivized around cash efficiency metrics?
- By bringing on relevant new investors could you launch new products, quantum leaping your market share?
- Is your balance sheet fit for scaling or are you creating more risk by staying small? Does your capital structure match your operational plan?
- Is it time to tidy up the shareholder register to ensure you have shares in the hands of people that make a difference to your success?
- Is the tax structure of the group optimized to ensure you minimize leakage of cash through tax payments?
- Is it possible to partner with a larger player to win more presitgious accounts? Should you take on a fresh injection of cash through the selling of a minority stake to a strategic partner?
- Should you own everything in your business or should you sell it and lease it back, e.g. property, equipment, and cars?
- Should you outsource some services instead of carrying the overhead on your payroll?
- Do you consider the allocation of your time as CEO an investment decision?