Used a common sight in the fields of finance, but rarely in the economy "plowback." Is
Plowback assumes all or a portion of retained earnings (profits) and essentially reinvesting in the company for working capital (such as inventory and equipment purchases), overhead (such as marketing or R & D) or purchase of capital (such as new plants and equipment) - items that are usually financed by external capital raising, as debt or equity.
With capital raising options decrease from day to day, for additional cash flow of the company was the only surviving factor that many small and growing businesses to leave, should be independent of the economy, something that all businesses make a solid practice.
Think of it this way:
Suppose your company earns $ 150,000 in sales per year and that spending even $ 150,000 in direct costs and fixed -. Leaving the company with little or no profit But this year, the company needs to buy a new device will cost $ 15,000.
This new piece of equipment to improve operational efficiency and reduce their total direct costs of a combined net of 5% per year over the next three years (the useful life of equipment).
This means that after purchasing the equipment, change nothing else, the company should be able to realize a net income (profit) for this year by 5% or $ 7,500 per capita. Not much, much more than what the company has been making this point.
But the company does not have the money in hand to make the purchase and therefore to borrow $ 15,000.
Now, remember, the company makes no profits at this time - neither net profits nor operating profits - profits that are used to make payments on the loan could. So, if (and that's a big "if") - if the company can get a lender to borrow this money he save 5%, since the loan was excellent eating.
Say that the lender agreed and granted a 36-month loan at 10%. The loan would the company $ 484 per month or $ 5,809 per year cost. Take it left $ 7,500 in savings and the company with a net profit of $ 1700 single year.
Say, however, that the company took another path. In this case, the company is all reviewed its costs - line by line - and has an average savings of 10% to the cost:
He found his staff to change to part-time or fixed-term instead of paying full-time for rest in between jobs.
It negotiated the lease in a long-term contract with a lower monthly rate.
The time to buy a major lever to reduce inventory and equipment, the timing of their purchases material costs.
You looked better targeted marketing opportunities, better results at lower costs provided.
The list is long.
In fact, the company has sought and ways found to reduce the burden of all cost items finding a net savings of the company by 10% per year.
Well, not only that, the company reported net income or retained earnings in the amount of 10% (or $ 15,000 a year), but could use these funds to purchase the equipment actually.
So the company buys the device (without additional loan costs), the 5% savings with this purchase for the next three years and continue to cut costs by 10% for the life to achieve the company recognizes. It's a win / win for the company.
If we compare these two scenarios over the next three years, we see:
In the first scenario, the company realized a net benefit in 5076 in the three years back on the way it is today (no net profits).
In the second scenario, the company realizes savings of 5% of the assets ($ 7,500 per year) and all the cost savings of 10% of the company ($ 15,000 per year) for a total realized 3-year profit of $ 67.500.
In addition, 10% of total economic savings even after the useful life of three years, the equipment long.
Even if found, the company could not all these cost savings (maybe just half or a third) - these savings will go a long way in reducing the amount of money that the company had to borrow as still more profits in offer in the coming years.