Finance Fundamentals – Employing Capital

Introduction

In this part of the Finance Fundamentals series, we're exploring how to employ capital effectively in your business.

Once you have raised the necessary funds, whether through traditional loans, venture capital, or angel investment, the next step is putting that capital to good use.

The key question is: how do you get the best use out of the money you have secured?

In this article, we’ll touch on the high-level concepts of capital employment and how to allocate resources in a way that maximizes growth and profitability.

The goal is to make sure that when you have capital, you employ it in the most efficient way possible to achieve long-term success.

Return on Investment (ROI) & Return on Capital Employed (ROCE)

When discussing the employment of capital, the first thing we need to consider is Return on Investment (ROI). At its core, ROI is a measure of the profitability of an investment relative to its cost.

However, as you progress beyond early-stage funding, you might want to use a slightly different metric: Return on Capital Employed (ROCE).

ROCE is a more holistic approach to measuring the effectiveness of employed capital because it focuses on the total capital invested in the business, rather than just profit generation.

It evaluates how well capital is being used to generate profits, regardless of where that capital came from (whether it’s self-funded, venture-backed, or through traditional loans).

When you employ capital, your goal should be to achieve a high return on that capital. Whether it’s $1,000 or $50 million, the intention is the same: to generate profit that is above and beyond the initial investment.

That could be in the form of product development, infrastructure expansion, or marketing efforts.

Key Areas for Employing Capital

Now, let’s break down some key areas where you should focus on employing capital effectively:

1. Research & Development (R&D)
R&D is the cornerstone for businesses that want to stay ahead of the curve. No matter how established you are, there is always competition trying to take market share.

For most businesses, investing in R&D is essential to keep innovating and improving the product or service offering.

For instance, many businesses in industries like tech, healthcare, or manufacturing thrive on continuous improvement. If you're not innovating, your competitors are.

Investing in R&D can lead to new products, improved versions of existing products, or services that open up untapped markets.

2. Infrastructure
Infrastructure is a broad term that refers to the physical and technological systems that allow a business to function smoothly.

Whether it's buildings, machinery, or the software systems that drive your operations, maintaining and upgrading infrastructure is essential for scalability.

For example, your customer service department may need a modern CRM system to manage customer relationships more effectively, or your manufacturing plant may need new machinery to boost efficiency.

Employing capital in infrastructure enables businesses to run more efficiently and scale more effectively.

3. Project Management
Capital is also required for managing the transformation of ideas into tangible products or services. It’s not enough to just have ideas; you need a solid project management framework to execute those ideas effectively.

From managing R&D projects to ensuring that products are developed, tested, and brought to market in a timely manner, project management is a critical factor for success.

A project manager ensures that resources are allocated correctly, timelines are met, and the product is ready for customers.

4. Go-To-Market Strategy (Sales & Marketing)
Once you've got your products and infrastructure ready, the next crucial step is getting the word out. This is where sales and marketing come into play.

You need to allocate a significant portion of your capital to marketing, whether it’s for a digital marketing campaign, hiring a sales team, or hosting events.

The right marketing strategy will ensure that your target audience knows about your product, understands its value, and takes action to purchase it.

Whether you're a B2B SaaS company, a product-based business, or a service provider, building awareness, attracting leads, and converting those leads into customers is vital for growth.

From social media ads to content marketing and founder led thought leadership, SEO, digital campaigns, and sales intent signal outreach, investing in the right sales and marketing motions will help you drive demand and increase your revenue.

Balancing Capital Allocation

As you can see, employing capital is all about balance. You can’t just throw money at everything and expect instant success.

Capital must be strategically allocated and managed across different business functions to ensure that each part of the business is optimized for growth.

The percentage of capital that should go into each area will vary depending on your business model, stage, and industry.

For example, an early-stage SaaS company might focus a large portion of its capital on R&D and product development, while a more established e-commerce company may focus on improving its infrastructure and expanding its marketing efforts.

Security and Risk Considerations

When employing capital, especially when it comes from external investors or loans, you must consider the security and risk factors involved.

Are there personal guarantees required?
Have investors taken equity in exchange for funding?
What collateral will be necessary for any loans?

Understanding these factors ensures that your capital deployment strategy aligns with your overall risk tolerance and long-term goals.

While securing loans or investment may involve giving up a portion of equity or taking on personal guarantees, it is also essential to understand the potential for significant growth that can come from employing capital wisely.

The key is ensuring that you have a clear understanding of both the short-term and long-term impacts of each funding decision.

Conclusion

Employing capital effectively is about ensuring that every dollar invested works hard to produce a return for investors and stakeholders.

Whether it's through R&D, infrastructure, project management, or marketing, each area requires careful consideration and planning to ensure that your capital is being used efficiently.

If you’re unsure how to best employ capital in your business, consider doing a deep dive into each of these areas.