Any form of business regardless of the industry eventually boils down to the ROI (Return on Investments) or even ROA (Return on Assets) as they are the elements that present whether a business is being operated optimally or otherwise.
The fact is that these two elements of financial management provide a clear and present picture of how a business is aligned to business objectives which no matter how it is spun around return to the fundamentals of profit.
It is how decisions on investments are generally made which means that the ROI and ROA tell investors how much every dollar invested delivers profit which is crucial towards ensuring a business remains profitable.
The ROA which revolves around the asset structure of the business in particular offers shareholders a glimpse on how assets are being utilised and if at all a construction business ‘owns’ machinery such as a mini excavator that costs easily 40 to 50K and is only being used on a small number of projects throughout the year then the utilisation of assets will be easily declared as ‘underutilised’ as it would be more profitable to rent the mini excavator for these few jobs at a few hundred dollars and invest the remainder of the money elsewhere where the returns are higher.
This is simply based on the fact that each time the excavator is put in a garage for weeks; it is money sitting in the garage, money that would otherwise be earning interest in a fixed deposit under the company account.
Renting expensive equipment such as using an excavator hire company is a more justifiable approach towards small projects that only require such machines to be used for either a few hours or a few days. The machine generally probably costs three to four times more than the entire project to own, and this is not inclusive of having an operator on the payroll.
For instance, a landscaping project or home improvement project that is budgeted around 20k would only require a mini excavator at the most two days and would cost less than 1k to rent inclusive of the operator, excavator hire rates / prices usually ranges between the $200 to $300 per day range.
This compared to hiring a bunch of workers that charge no less than 20.00 an hour working for 8 hours a day for a week would cost 3 times as much and take three times the amount of time needed to do the same job using a mini excavator or other power tools that are not only costly to own, but have a significant maintenance cost that cannot be overlooked from a business perspective.
From this perspective it becomes necessary to look at the subject matter from the perspective of bankers and investors as they need to understand every decision made by those that run the business and in the event that they find unjustifiable decisions being made, it automatically erodes confidence that may cause them to hold back funding and limit the growth prospects of the business which is never a good thing for small and medium enterprises.