In turbulent times, strategic capital allocation is crucial for firm survival.
This year arrived with many unexpected events: wars raging around globe, a crazy election cycle, and downturns in the economy. Firm owners must be cautious and aware of how to face these challenges. Intelligent capital allocation will be key to your firm’s survival when these surprises come.
What is capital allocation? Being able to correctly answer this question could result in your firm either financially succeeding or failing. Capital allocation is the action plan of figuring out how to make the most of your company’s money. Sounds simple, but now what? What does it really mean and how can you be a smart capital allocator for your firm? You can effectively deploy your capital by:
- Investing in building the culture of your firm. We all know that our people are the building blocks of our firms, but ensuring they fit in the right place is another story. This is where major headaches are formed. Investing in culture means paying people fairly, having generous family-friendly benefits, making the onboarding experience memorable, ensuring your office is somewhere people enjoy being, having company retreats that build trust and camaraderie, and paying for training, development, and relevant certifications.
- Allocating marketing dollars wisely. If a downturn occurs later this year, will you begin cutting your firm’s marketing budget? Leadership will only consider this option when their firms are not correctly utilizing their marketing spending. Deploying capital into email marketing, strategic networking, enhancing your website, maintaining your databases, and utilizing effective software to make your brand known will only help you stand out from your competitors. Being bold when everyone else is cutting back will differentiate your firm.
- Preparing for ownership transition. The time will come when the founder or current owners will want to retire internally. Putting money aside will allow the transition to go over smoothly. This will make the transition to the next generation of leadership much easier due to the firm’s preparation. The exiting owners will have less risk cashing in their investment since there are funds available, and you can also use that transition fund to pay for a formal valuation. This will allow the owners to know the true value of their company by a certified, AEC specific professional. Another added benefit is that the firm will have less debt on the balance sheet. This will put you ahead of many ownership transitions that happen in the AEC space. You may ask, how much money do I need to set aside? Starting now will help you build up the reserves you need so you won’t be caught unprepared.
In order for you to invest your capital on the list above, there must be three things that come into play. You’ll need:
- Capital to deploy. How do you get more capital? By demonstrating the indispensable value you offer to clients and doing quality work. If you do not have any leftover capital to deploy, then something’s not working. Generating sufficient free cash flow is crucial for the survival of a firm. If you do not have it, then you will be unable to invest in quality culture, marketing, and ownership transition planning. This will only limit your opportunities.
- A shared vision. Owners must effectively communicate the vision of where the firm is going and explain with clarity how these capital allocation decisions will beneficially impact the rest of the firm. Explaining why may be difficult, but if the decision aligns with the core values/strategic plan of your firm, it must be done.
- A process where results are measured under an objective view. This will empower you to show the results of your capital allocation decisions to your employees. Being transparent will help skeptics with buy-in. And, if your capital allocation decision isn’t panning out quite as you anticipated, you can course-correct without having deployed all your capital. Having monthly and annual reviews on the return on investment is key for capital allocation.
Ezequiel Tovar is an analyst within Zweig Group’s ownership transition team. Contact him at etovar@zweiggroup.com.
