Reducing Your Financing Costs Gives You a Discount on Everything You Buy

Reducing Your Financing Costs Gives You a Discount on Everything You Buy
Published Date: 2008-07-24 17:10:14 WorkOnInternet.com

How would you like it if you could get an additional discount off of almost everything you buy, after having negotiated your best deal? That's what reducing your cost of capital (especially your cost of equity) can do for you.

Most CEOs are delighted if their company's stocks can sell around the industry average price/earnings ratio. If they can do better than that, the leaders are even happier and will usually avoid using the stock to buy anything in order to protect the multiple. Both views are major missed opportunities. As a result, almost all companies today lack the fundamental skill to create and sustain a stock-price premium that can be used to lower the company's cost of providing offerings.

With a sustained price/earnings premium, a company can use its stock in ways that shareholders approve to have the equivalent of a discount compared to competitors on everything the company purchases, from other companies to compensation to supplies. For instance, one company may be looking to purchase another for cash. Let's assume that the price is one hundred million dollars. If the company that is purchased earns more cash than the interest charges on the money borrowed to buy it, the acquiring company sees its cash-flow-per-share rise.

If not, the acquisition is reduces cash-flow-per-share. If another company has a high stock-price multiple that is unaffected by making the same acquisition, that stock-based purchaser sees its cash-flow-per-share break-even coming at a much higher price for the company.

Companies with rapid growth in stock price also find that the cash costs of their compensation for key employees falls. Employees are interested in getting stock options rather than cash both because of the upside potential and because tax rates are lower on this income. Further, the stock options don't affect company earnings as much as cash payments do.

Also, companies can simply issue stock to get the cash to make other kinds of investments and purchases. Where the source of this cash is cheap enough, it is like getting a discount on whatever the money is used for.

Here's an example that many people never consider for implementing such a strategy: Issue new stock whenever your multiple is well above its historical trend and buy back share (in excess of what's required to offset employee stock options) whenever your multiple is well below its historical trend level.

Copyright 2008 Donald W. Mitchell, All Rights Reserved

------------------------------

Donald Mitchell is chairman and CEO of Mitchell and Company, a strategy and financial consulting firm in Weston, MA. He is coauthor of seven books including Adventures of an Optimist, The 2,000 Percent Solution, and The Ultimate Competitive Advantage. You can find free tips for accomplishing 20 times more by registering at:
====> http://www.fastforward400.com .

This article was published on WorkOnInternet.com
The URL for this article is : http://www.workoninternet.com/article_24405.html
The URL for the category of this article is : http://www.workoninternet.com/topic_12.html
Work On Internet : the small business and home business online resource center
List extensive information on building a successful small business or home business online by internet marketing.

Latest articles published on the topic :
"Home Business & Small Business Articles"
How to Maintain Sales Motivation in an Uncertain Economy
Why smaller businesses can grow more in this recession
How Much Do You Invest In Your Internet Home Business?
Make good sense of a fickle economy: select the right people
Wholesalers - How To Find The Legitimate Ones Out There?
Yes Your Employees Might Try And Steal From You
Better Customer Service
How to Make an Ad Space Sales Call
MLM training? Get a coach!
Work At Home Opportunities - 2 Inexpensive Choices