A short time ago, I mentioned that some enterprises are said to or wish to get returns of up to 30 or 50 % these days. Formerly – up until at least the 1970ies – companies were satisfied with one-digit numbers of returns, often low one-digit numbers.
In this article, I want to think about what return should be used for.
The answer is obvious:
For security (a little) and growth (very much).
In general terms: because if the cash box is full, life is easier. The big concerns still aggressively expanding need (or think they need) a particularly high growth. Very good returns are the only way to collect a lot of money on the exchange market. And you need a lot of money in order to take over the competition or merge with smaller enterprises the potential of which is an ideal complement to your own. For taking over as “share swap”, a high market value, is, naturally, also very much of an advantage.
And why do you need a lot of money for growth? I see three reasons. Here is a list according to current priority:
- The first is the “customer and market manipulation“, also known as “distribution” and “marketing”. As a general rule, by far most of the money is used for achieving growth.
- The second is research and development (R&D). Less and less seems to be spent on this.
- The third is the general money you need for investing in production plants, etc. Originally, this was what banks and the exchange market were there for. Investment, however, lost its importance, because, due to reduced production depth and leasing concepts, it is now done by subcontractors or otherwise financed (for instance leasing).
Being a medium-sized service provider, our distribution costs are low. What we spend for research and development is mostly for advanced education, which costs us quite a bit.
The remaining need for money is because we have to pay incomes and salaries in advance, until our customers pay. Unfortunately, the payment periods increased considerably in recent years.
My next article on “growth&return” will explain why there seems a general agreement that an enterprise must have several times more return than it had 40 years ago. It has nothing to do with greed. The reason is quite simple and logic.
RMD
(Translated by EG)
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