2012 and 2011 LEFTOVER

As I spent Sunday morning watching the “talking heads” on Fox and NBC, one word they don’t seem to have in their vocabulary, is investment. This has been bothering me in all of 2011. This was again bought to my attention as the “talking heads” up dated the listening nation on the Republican primary in Iowa this first day in 2012. Not once did I hear the word “Investment”.

As “Activities for Learning, Inc.” (AFL) prepares plans and budgets for 2012 we project cash flow. We do not separate expenses and investments. In my own thinking, I see a difference, as a company we don’t discuss it. But what is the best way to develop a company culture that plans investments, expenses in relation ship to cash flow.  Definitions are further confused by accounting rules as I will explain later.

First, my definition of investment. If money spent has a residual value greater than one year it may be an investment. Some examples of are: education, training of employees, building, molds, and of writing books. To make this confusing, non could be an investment. Without job skills it is an expense. My favorite debate on expense versus investment is inventory. Accounting rules say it an asset (Investment). If just in time  (JIT) inventory management is used it is an expense, all inventory cost are in “Cost of Goods Sold”.

To update myself onto a more standard definition of investment I put this string into Google search “expense verses investment”. Among the many trash returns I found a web Blog by Gordon Hestor on page http://www.gordonhester.com/?p=591. On this page there is an earlier blog post yielding this is very rich diagram in figure one.

Figure 1

The message in Mr. Hestor’s blog is that investment alone can be an expense unless it is marketed and is well managed.

I would like to elaborate on his flow chart with a Venn diagram shown in figure below. 

While Mr Hestor may have emplied in fiqure one what fiqure two shows, to assure success of Innovation, Marketing, Management must overlap and are effective when a company culture emphasising team is developed. To illustrate, which category is shipping? In reality it falls in all three. If a untrained person in shipping packs a incorrect item, innovation is erased, a customer is unserved, and money spent provides no return to the company.

This brings us back to the discussion of expense versus investment, cash flow forecasting and budgeting. To effectively manage a company there are times it is essential to operate with a negative cash flow.  AfL works toward JIT inventory management. It turns inventory three to four times a year on the average. Because of inventory  lead time AfL have to operate with negative cash flow when building inventory. While classical accounting say inventory a asset, It is in fact a expense.

Spending money to develop a JIT system where a order is received in the morning, built and shipped in the afternoon, would be an investment. To achieve this goal will take several investments with each step returning cash for the next investment.
A final point needs to be made. The best investment in money and time for me was my education. Not just my BSME but my continued development of knowledge and skills. I cannot produce a chart to show return on investment. Not all investments are measured in dollars and cents.