Are You Under Capitalized?

Quote of the month:
“Care more than others think wise. Risk more than others think safe.
Dream more than others think practical. Expect more than others think possible.”

---Howard Schultz, CEO Starbucks
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More than anything else, business failures are caused by undercapitalization. Organizations find themselves stretched to pay bills, staff their companies, and provide excellent customer service and a healthy return on investment.

One of your primary responsibilities as a business owner—or for that matter as a family leader—is to accrue and protect your capital. We often think of that capital as our assets—money, inventory, customer lists, real estate or other property.

In his book Family Wealth: Keeping It in the Family, James A. Hughes suggests that the primary pillars of wealth are human, intellectual, social and financial capital. Hughes explains that the well-being of an organization or a family depends on strong portfolios in all of these areas.

Intellectual capital is what a company knows. It’s the organization’s commitment to learning and the value it places on competitive recognizance. Organizations that include training as a budgeted expense line item clearly demonstrate their intent to grow in this area. The ones who create a team of learners leverage their intellectual capital further. Intellectual capital is how the business or family uses its history to forge its future.

We need to document our knowledge in order to have access to it in the future. We need to chart our successes and our failures. We want to repeat promotions that worked well and abandon ones that didn’t.

Human capital is the people in the organization. Not surprisingly, strong companies attract the best people. Human capital includes the leadership as well as the front line team members. Great places to work are also great places for their clientele.

Human capital is compounded by the respect team members show for each other. In his book How Starbucks Saved My Life Michael Gates Gill relates the impact of working for a company that places value on each individual in the organization and compares it to his many years as a successful but unappreciated executive in the advertising industry.

This asset grows most in environment with clear goals and great celebration for meeting them. A published organizational chart and a clear chain of command, job descriptions, an employee handbook and a system for regular evaluations based on mutually agreed-on goals will help expand human capital.

Social capital is the relationships within and around the organization. A company’s social capital includes its reputation in the community and the way in which it contributes to the fabric of that area. Being a good corporate citizen and giving something back increases social capital.

Businesses without good databases are letting valuable resources slip away. Failure to mine that database—to keep in touch with those customers and to continually make them special offers—erodes social capital further.

Today’s shift from e-mail to social networking emphasizes the difficulties in maintaining our connections. People want deeper, more meaningful relationships. They want to buy from associates who engage in relationship-focused--not product-based—selling and who treat them as individuals.

Financial capital is not unimportant. Organizations do need to manage their inventory, cash and receivables well. They need to buy prudently and spend wisely.

In some cases, it makes more sense to invest in a more expensive piece of equipment, software, or fixed asset than to buy a cheaper product that doesn’t entirely solve the problem.

As interest rates fluctuate, it may make more sense to take an early payment discount or to let the funds accrue interest in a money market account.

There is no single best kind of capital for your company. To be successful you need great people; you need to be well trained and committed to on-going learning. You need a wide social net to grow your business, and yes, you need to be well-financed.

How well capitalized are you? Where are your opportunities to increase your assets? What resources are underutilized? Where are your efforts going to have the greatest return?

Your future may depend on how you can answer those questions.