How To Master The Skill of Capital Allocation As A CEO

Saturday, December 09, 2023

Do you want to know the one skill that separates the world’s most successful CEOs?

Most people think it's about sales, product, or vision. But truly, at its core, no CEO can become successful without being a great capital allocator.

Now, you might be wondering what a capital allocator is? Think of it as being a money manager, but for your company. It's deciding where to spend money, whether that's hiring someone, choosing a vendor, or determining which projects to invest in.

For your business to not only survive but also thrive in any economy, mastering this skill is vital.

Here are 5 key lessons I've learned from starting, bootstrapping, scaling, and exiting two companies before the age of 30, all without raising a single dollar of venture capital:

1. Mastering P&L Management:

Your P&L isn't merely numbers; it reflects your business decisions. Ensure it provides a detailed breakdown of every expense. Many P&Ls lack the granularity needed to scrutinize expenses and identify unnecessary expenditures.

2. Payroll Management:

Your team is crucial, but often they're also a significant cost. Continuously evaluate each member's ROI. If someone isn't generating ROI, maybe you should rethink their role. During economic downturns, a RIF often boils down to ROI.

Assess your payroll weekly. Sometimes, especially when bootstrapping, it’s more cost-effective to engage part-time workers, freelancers, or consultants instead of full-time employees.

3. Vendor Due Diligence:

Vendors can be a major expense. Choose them wisely. I once committed to a new vendor without thoroughly evaluating them and it resulted in a costly setback. Once you commit to a vendor it’s hard to get out of it so slow down your due diligence and make sure it has a good business case for you.

4. The ROI Lens:

Every expense on your P&L should yield an ROI. Protecting cash flow is a CEO's duty. Whenever the balance turns negative, a RIF or layoffs is bound to happen. Every hire, marketing channel, and vendor should be evaluated based on ROI.

5. First Principles Thinking:

This approach has helped me come up with a lot of good ideas. It's where you challenge the norm and explore a better or more efficient way to do something. It’s about finding new solutions that offer greater leverage. For capital allocation, this might mean employing offshore virtual assistants over U.S. full-time staff, using a marketing agency instead of an in-house employee, or leveraging a partner's sales team instead of building your own.

Implement these principles in your business and watch the transformation. For more insights on becoming a great capital allocator, I've crafted a free resource for you. Click the link below for free instant access.

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