Corporate Finance: Save or Invest. What to do?

Some companies focus heavily on saving and expense re-engineering as the main driver for profitability. While savings are important for a company to be prepared for unexpected circumstances and even allow for medium and long-term planning, they have to be part of a broader business strategy.

Although effective in the short term, focusing heavily on the cost control item on the P&L tends to inhibit rather than boost growth and profitability in the mid to long term. In general, businesses will benefit more from reinvesting in assets that enable growth than from having short-term savings. While all companies must keep a close eye on (and maintain) a balanced cash flow, investment that increases productivity is ultimately essential for business continuity and growth in the long term.

However, defining where, how and what percentage of revenues to invest is neither an easy nor a straightforward decision. Business owners and decision-makers need to take several factors into account when planning whether to increase their savings or reinvest for the future.

Investment to Increase Profit, Foster Growth

A fundamental strategy is to reinvest savings to increase productivity or optimize operations. This can range from buying new equipment and state-of-the-art technology to hiring additional personnel or renovating facilities.

Such a strategy should be outlined within a broader context, with decisions based on market conditions. If the market can not only accommodate but is actually showing demand for the service or product being offered, a company has the potential to turn savings into incremental growth and profits. Watching market trends and investing in R&D is pivotal.

This is easier said than done, as a proper analysis has to consider consumer demand, trends in the industry, supply chain capability and socioeconomic and political scenarios, at the very least. While it might seem like a daunting task, a careful study of the addressable market and the possibility of capturing it can be deeply rewarding for a growing business.

Investing to Optimize Operations

According to data from the Global Business Spend Indicator (GBSI) published by American Express, 45 percent of Mexican companies expect to spend more on technology. The survey showed that 50.2 percent of businesses want to increase productivity while 49.8 percent are looking to improve the quality of their products.

In most cases, business operations can be greatly optimized. Technological tools offer a vast array of customizable solutions to both identify possible inefficiencies and then address them. In many cases, companies seek to expand by purchasing new equipment or moving to bigger facilities without realizing their operation is leaving profits on the table due to badly designed processes. Such cases might be better served by investing in optimization.

Optimization should not be seen as a purely technical challenge. It also means making sure our teams are able to engage at their best by investing in tools that help the organization support employee well-being, having clear career plans and providing the right tools, training and equipment for people to do their job successfully.

The bottom-line return of such investments might be harder to identify, as it cannot be as clearly attributed to the acquisition of a specific asset; however, there are studies that clearly prove that having an engaged and happy workforce is directly correlated to growth, profitability, customer engagement and better brand positioning. People are the foundation upon which businesses build sustainable growth. 

When, after thorough analysis, a business determines the amount of savings it should keep as part of its growth strategy, there are different ways in which a company is able to make the most out of such capital. Make sure you invest in the right financial alternative, one that provides both financial gains and enough flexibility to act fast when needed. 

In a nutshell, a good and sound business plan must include  growth objectives, cash-flow generating initiatives, investment requirements, clear timelines and milestones to be reached for investment to be executed, but also, very importantly, a clear set of periodic metrics or indicators to keep track of our overall business health, which will help us make the decision to either save or invest to be fully prepared for unforeseen market circumstances.