By John Barrington
The earlier post on return on capital provided a very simple example of how this ratio is calculated and why it is more important than profit alone. But ROC is about more than the numbers. Much more; it is a management philosophy; a mind-set.
We have worked with many companies to instil an ROC discipline and most have at least accepted the reporting regime. Some have taken it down to business unit level and management dutifully report their new KPI on a regular basis. And it has made not a dot of difference to the way they manage, the way they behave and how they deploy their capital.
This is because they report the numbers without truly understanding the philosophical implications of the journey upon which they have embarked.
Generating returns on the capital being deployed is not about the numbers, for they are simply an outcome. It is about a mind-set that allows disciplined management to discern between alternative investment options, between alternative strategies. And to choose the option and strategy that will generate the greatest return on the cash being invested.
Relatively simple in concept, but difficult in implementation.
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