CFO Magazine recently interviewed the CFO of Intuit (the company behind QuickBooks) regarding their financial strategy for capital allocation and investing for growth.
Even though Intuit is a large, global company, many of its goals are relevant and useful for small businesses and medium-sized businesses here in the San Francisco Bay Area as they try to improve their profits and cash management.
Here are some insightful excerpts from the interview:
“Even a great company can’t thrive long-term if it’s growing expenses faster than revenue. At Intuit, that means we focus intensely on how we allocate capital. It’s one of four fundamental financial principles, which include:
Grow revenue organically at double digits
Grow revenue faster than expenses
When allocating capital, spend it on the highest-return opportunities
Always have a conservative balance sheet”
“Having a disciplined approach to capital allocation is a core pillar. It breaks down into three broad categories: First, how do you manage spending internally? Second, how do you invest money in inorganic growth? And third, how do you manage returning value to shareholders?”
“As a rule of thumb, we target investing between 15% and 17% of our total revenue in R&D, which at Intuit is primarily software development. It is a basic metric, and one you can benchmark against other companies. But it’s not about who is investing more or less than your company. What’s important is that the investment level is right for your organization.”
“To make sure we’re reinvesting properly, we look closely at what type of return we can expect with the dollars we invest in a particular area or project over a five-year period; for internal investment we’re typically looking for customer and revenue growth.”
“If you’re examining your own capital allocation strategy, here are four tips to consider:
Align. Your capital allocation strategy should be in support of your company’s strategy and strategic priorities. The two should be tightly linked.
Identify. Be clear about what your principles are. Regardless of whether you land on guidelines similar to those I have laid out, it’s very important to know what your own principles are and have them clearly stated within the company.
Articulate. In any category, whether it’s internal investment, M&A, or return to shareholders, articulate your expectations for return on investment. At Intuit, we have a hurdle rate of 15% for a five-year period.
Execute. Finally, admit mistakes and cut your losses in any area that is not meeting your stated investment objectives.”