Capital spending

Private companies face particular challenges as they try to expand their businesses in today’s uncertain business environment.

While the Canadian economy continues to expand at a moderate pace, continued depressed commodity prices led most especially by oil, political uncertainty and slackening demand overseas, threaten to ripple through global trade and decrease confidence. In Deloitte’s latest survey of US private company executives, growth in capital spending slowed significantly as other business metrics, such as profits and prices, moderated. That’s raising the stakes for Canadian private company leaders in deploying capital and seeking to maximize the use of existing assets and resources.

Issues

In seeking growth opportunities, private companies should remain focused on efficient uses of their capital. In tight markets, companies look for ways to reduce their cost structures, and they may create too many initiatives for their organization to handle.

“Capital availability is a challenge for many privately owned companies,” says Andrew Luetchford, a partner in M&A Advisory. “Although private companies have enjoyed an attractive financing environment for some time, today’s markets bring greater uncertainty due to global economic and political volatility and greater regulatory restrictions on sources of capital.”

This will likely reduce capital availability going forward, as lenders and investors become more cautious in their commitments. Companies will have to be more selective in the projects they undertake.

Speed in decision-making is effective only if the company defines the desired priorities and maintains its focus.

At the same time, private companies may also compromise performance and future growth by cutting into capital programs. Sharper risk assessment to help them understand the long-term implications of capital-spending decisions and managing the risk of implementing programs remain challenges for many private companies.

Faced with limited capital options and tightening credit markets, some companies are tapping working capital credit lines for long-term investments and to fund operating losses. Another issue for private companies is that they may not have the people in place to accomplish their growth goals, a problem they may compound by recruiting too soon or hiring people who lack the skills for the job.

Opportunities

Private companies might avoid these growth hazards by targeting specific projects, building momentum behind them, and accelerating their completion. In selecting growth initiatives, companies should take a disciplined path that removes emotion from the process. Projects should be assessed on factors such as balance- sheet effect brand impact, along with an evaluation of the resources required and the timeline for completion.

Cost reduction in the face of limited capital can be an important driver of performance, but companies should make sure the focus of each project under consideration is linked to the overall business strategy and financial goals. This will help executives identify initiatives with the potential to meet the company’s long-term circumstances.

In evaluating cost cuts, companies need efficient capital planning that weighs each possible outcome. This requires an environment in which managers and executives can speak freely, ask difficult questions, and challenge assumptions to pull together input from a broad range of stakeholders. Just by focusing on good decision-making, private companies may be able to boost performance at relatively little cost.

Today’s rapidly changing business environment offers privately held companies an advantage over their larger, publicly traded counterparts. Because they tend to be smaller and more nimble, private companies can evaluate, develop, and implement projects more efficiently than their larger competitors. Seizing these opportunities can be critical to a company’s growth, but speed in decision-making is effective only if the company defines the desired priorities and maintains its focus.

Even if the correct strategy is selected, organizations should have qualified people in place to implement it. While they may look to recruit outsiders, they should also consider developing talent internally, which can reduce the drain on scarce resources and mitigate skills shortages in the available labour pool. Limited talent resources should compel private companies to focus intently on the projects that can provide value and engage the workforce while putting other projects on hold.

Today’s rapidly changing business environment offers privately held companies an advantage over their larger, publicly traded counterparts.

Questions to consider

• Have you properly aligned your growth initiatives with your long-term goals for the business? 
• Are you setting the desired priorities for growth and capital investment? 
• Do you have a system for evaluating projects dispassionately and confirming that capital is deployed effectively? 
• Have you considered the financing options and sources of capital best suited to your growth strategy? 
• Are you recruiting qualified people and do you have the proper practices in place to develop talent internally? 
• Can you move efficiently enough to seize opportunities and enhance your competitive advantage without losing your focus on long- term goals?

Author

Andrew Luetchford
Partner
M&A Advisory
aluetchford@deloitte.ca