TECT, a family of manufacturing companies serving the aerospace and energy industries, has announced a strategic plan focused on reinvesting almost all free cash flow into manufacturing technologies and capacity expansion. To support this plan, TECT arranged a new credit facility to provide even more capital.
Distributors often also need additional capital to grow their businesses when annual cash flow is insufficient. In The Little Black Book of Strategic Planning for Distributors, Brent Grover offers three tips for considering how to fund strategic initiatives.
- Consider the benefits of leverage. “One of the principles of strategic planning is that many companies don’t have enough debt,” Brent says. Leverage can magnify return on investment. See Brent’s most recent book for a strategic profit model that demonstrates the affects of leverage on ROI.
- Understand owners’ priorities. Fast-growing privately owned distribution businesses often face a conflict between owners who want to invest in growth versus those who want to distribute profits to working or non-working owners. The strategic planning team must also consider that shareholders’ and managers’ risk tolerance may fail to align with growth strategies that involve increasing debt.
- Dissect your balance sheet. Heavily leveraged assets make it more difficult to secure a loan and may affect loan terms. Brent says a conservative balance sheet “has no more than $2 of debt for every $1 of equity (2:1 debt-to-equity ratio).”
How much leverage is too much depends on several factors. For more guidance, see Chapter 6 in The Little Black Book of Strategic Planning. Don’t have your copy yet? Order a print copy today to receive free shipping, or purchase an electronic copy for your iPad, Nook or Kindle for instant access.