What does a dollar cost you?

A Kiwi company Outlier Space raised US$7.35m last week to build a spacecraft that will not fly until 2028. Outlier Space was founded by Jamie France, sixteen years on America's Cup campaigns, then the best part of a decade at Rocket Lab.

GD1 led the round, with Icehouse Ventures and Airtree alongside. They signed that cheque against a return at least two years out, with their eyes open. Before the investment was made, everyone coming on had a view on what a dollar in that business was worth.

That is a hurdle rate. It is the minimum return an investment has to earn before it is worth making, and it is the single most useful number a business owner can carry around in their head.

Founders and business owners make the same decision every week. Stock. A hire. A marketing campaign. Sixty-day terms for a customer who asked nicely. A trade show, because you went last year. Every one of these decisions is an investment with a return attached. It is likely you don't write the number down.

The money that gets scrutinised, and the money that does not

Here is the pattern I see often in businesses.

Borrowed money gets scrutinised, because it comes in with a price on it. From the funder there is a letter, a rate, a term, a covenant. It gets three conversations and a spreadsheet to justify.

The money already sitting in your account gets waved through, because nobody sends you an invoice or a loan document for it. What can be happening is capital gets rationed on how visible it is, rather than on what it returns.

A $40k overdraft extension gets agonised over, but the $180k sitting in stock that has not moved since March gets nothing, because it was allocated one purchase order at a time and nobody ever added it up.

This is the same money. One of them has the price on the outside.

Your bank did the maths

In June the Reserve Bank's own retail series had the SME overdraft rate at 9.73%. A six month term deposit paid 3.45%.

Sit with those two numbers for a moment.

The bank looked at your business, priced the risk, and decided a dollar in it was worth 9.73%. That is a hurdle rate. It is sitting in your business right now, and somebody else set it. If the things you fund out of retained cash do not clear this rate, the bank is a better investor in your business than you are. And if you really believe that, the best move is to pay the facility down and stop.

That sounds harsh. It is not meant as a criticism of anyone's judgement. It is just the maths that a lender runs as a matter of course and that most owners never run on themselves, because nobody ever asked them to. Funding also got more expensive three weeks ago. The OCR went to 2.50% on 8 July, the first rise in three years, and the banks have it at 3% by Christmas. Every capital decision on your desk was repriced in July. It is as important as ever to make your investment decisions with clarity.

These decisions can be challenging when you are chasing growth and I have experienced this first hand as we funded growth using debt. We needed to stop and look at the expected returns on the investments being made and whether the hurdles set by this cost of debt were being passed. These are sobering discussions to have but ultimately provide clarity in your decision making.

Three places the price hides

1. The terms you granted.

Moving a good customer from 30 days to 60 on $2M of revenue lends them about $164k, at 0%.

The working is simple enough to do on the back of an envelope. $2M over 365 days is roughly $5,479 a day. Thirty extra days of it is $164,383. At 9.73% that phone call costs you roughly $16k a year.

Nobody books it. It never shows up on the P&L as a decision, because it was never made as one.

2. Stock, read by ageing rather than by total.

The total is a balance. The ageing is the invoice.

Anything that has not moved in six months is not just stock. It is a term deposit you cannot break, paying you nothing. The stock report most businesses run tells you what you own. The one worth running tells you how long you have owned it.

3. The project you are funding out of cash flow precisely because it does not need borrowing.

This is the one that never gets ranked against anything. It skips the process entirely, because the process is triggered by needing to ask someone for money.

"We can afford it" is not a reason. It is an observation about your bank balance.

A simple exercise

A simple exercise to help with clarity on where you are spending your capital. Write down what a dollar costs you.

Use your facility rate if you have one with the bank. Use what your best available project returns if you don't. Then run the next three decisions past it.

You are not looking for a precise number. You are looking for a number good enough to rank things with, because ranking is the part that is missing. Most owners are not making bad capital decisions. They are making unranked ones, which over a few years produces the same result.

This may not change your decisions, but it will help you ensure you have clarity on where best to place your next dollar to achieve the goals you have for your business.

If you cannot say what your last $100k earned, you did not invest it. You spent it.

If you are running a $2M to $30M business and cannot say what your capital is currently earning, that is a conversation worth having. Get in touch and we can work through what a dollar actually costs in your business.