Welcome to the 2020 Vitalis #BusinessChallenge!
If you have been following the Vitalis 2020 #BusinessChallenge weekly, you should by now have a clear idea of what you want to achieve in your business.
Last week we spoke about the resources needed to achieve your goals and now we will look into how you should allocate those resources for maximum benefit.
There are numerous software systems available on the internet to assist you in doing this. You can also find a project manager who should be qualified in the various project management approaches to assist you with this.
The basic principle of resource allocation is as follows:
You have R100 in your hand and you need to buy a product to sell. Are you going to buy Product A or Product B?
– Product A can be purchased for R100 and be sold for R130, or
– Product B can be purchased for R90 and be sold for R120.
Most entrepreneurs would do a quick calculation (on the back of a cigarette box as my accounting principle used to say) and say “Product A because I am getting in R130. This is R10 more than product B.” Unfortunately, Return on Investment (ROI) has nothing to do with turnover, it has to do with the profit made on the money spent to make that money.
Product A gives us a gross profit, or an ROI, of R30 but so does Product B. The gross profit % or the ROI % is the deciding factor in this situation. Product B returns a profit of 25% whereas Product A only returns 23% profit. In business, you obviously want to make as much money as possible so you will go for Product B which has a higher ROI.
But, Resource Allocation is not that simple, it is a bit more complicated
Actually, it is a lot more complicated, but the example above can be used in your business with every C.A.P.S. in your business (see last week’s article)
Let us expand on last week’s example by assuming you have R300,000 available in your bank account to spend within the business, where will you spend it?
Will you spend it on the Calibre5000 machine to decrease the production time?
Will you spend it on employing more staff in your sales department to reach your sales goals?
Will you spend it on skills development courses for your production team to reduce the production time of the widgets?
Will you spend it on cheaper marketing platforms like Facebook instead of Billboards to ensure you stay within your budget?
And so the questions you can ask can get more and more in detail until it drives you insane!
What you need to do is:
Next to each goal, write down the costs which need to be incurred as well as the probable return (ROI or turnover) which can be achieved should the goal be achieved.
In our example, Production Goal 3 stated that we want to install and commission the new Calibre5000 production machine for Widget A to improve the quality of the Widget. This is a very subjective goal as we are not able to link a definitive ROI to this investment. Will our sales increase with improved quality? Well, not always and not necessarily so the ROI next to this goal will be zero rands as we cannot measure this right now.
Once you have done this, calculate the ROI % by dividing the ROI by the cost to be incurred.
Thereafter you need to start allocating your capital according to the best ROI %’s as this will give the business the best return for its money spent on investments.
This exercise needs to be completed with Assets, People as well as Skills. Every resource needs to be tested against the ROI it can achieve should they be allocated to a specific goal.
So this ends the STRATEGY part of the theme for the 2020 #BusinessChallenge. Next week we start with the theme CUSTOMERS.