Guest Post: Making Financial Decisions within a Project is an exert from Darrin Wikoff book Centered on Excellence
Return on Assets (ROA) is the indicator that supports the decision making process to determine which locations will receive capital investment from the Corporation, or additional market share as a result of their demonstrated efficiency.
ROA is a very dynamic metric and works like a pendulum swinging from a fixed point based on fluctuations in net income or net assets. The idea is to create a balance by increasing revenue to offset the cost of consuming fixed assets (operating and maintaining), or reducing costs to improve margins per unit produced while reducing your net asset value through depreciation. When developing your Financial Strategy you need to ask yourself a few questions:
- At what point will capital improvements impact my ability to maintain costs at an economical level?
- At what point do my current costs overcome my ability to depreciate assets effectively?
- At what point is it no longer economical to maintain existing plant assets, therefore causing me to invest capital?
- How much additional production volume is required to offset the impact of capital investment, assuming that the cost of maintaining these assets will remain constant or certainly not increase above current cost ratios?
- At what point does market value impede my ability to offset costs and eliminate the possibility of capital investment as a viable solution?
Two fundamentally bad financial models are those that focus narrowly on
“cost cutting to prosperity” or “buying your way to success”. Neither
of these strategies will sustain long-term benefits for your company.
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