Austrian Capital Theory Provides Principles Of Capital Allocation Every Entrepreneur Can Apply Right Now.
Why do we make the case that Austrian Economics is the best resource an entrepreneur can use to grow their business? Because the principles of Austrian Economics are clear, precise and can be activated immediately in any business decision.
Here’s an example: how to allocate capital in your business. Most of the capital that’s free to allocate comes from your cash flow, and it might also come from investors and lenders. Whatever the source, you must allocate it to grow your revenue and profit. How do you make the decision? Here are five principles:
Zero-based capital allocation.
Austrian Capital Theory prizes responsiveness to market changes – your capital structure should reflect the preferences of your customers, and those preferences are in continuous change. Therefore, zero–base all your capital allocation decisions. Don’t allocate based on what you’ve done in the past. Allocate based on where revenues and profits can be generated in the future. Sometimes this is called agility. Whatever term you use, make sure you are not allocating capital today simply to continue or repeat what you’ve done in the past.
Fund strategies, not projects.
Austrian Capital Theory directs entrepreneurs to focus on long term value creation. This means funding strategies not projects. Identify strategies that will produce growth, and then make sure you allocate sufficient capital to foster that growth. Projects can be initiated once the strategy is determined and launched. If you fund projects, the economic calculation can always be gamed – creating a spreadsheet justification for any project.
Continuously assess which strategies are creating value, and fund them from strategies that are not.
Capital does not have to be rationed. It should be allocated to those strategies that create value and deliver growth. There is always a source – strategies that are not creating value. It’s simple portfolio management.
No tolerance for bad growth.
Customers determine which strategies are delivering value for them and therefore delivering growth for you. The customer decides what grows. They won’t tolerate any offering from you that falls below their value threshold. And you should not tolerate the continuation of any strategy that falls below your growth threshold.
Know the value of assets.
Austrian Capital Theory identifies the value of assets as the future revenue and profit streams they generate from customers. When that changes, the value of the asset changes, and economic calculation must adjust. You should be continuously asssessing the value of your assets with this calculation.
Here is an example of these principles of Austrian Economics being served up in business language, from Credit Suisse. The authors make it sound analytical and strategic, but really it’s the expression of established principles that every entrepreneur can apply.
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