Justify your expenditure

09 November, 2007
With his views on the private/public sector dichotomy vindicated by a recent example, Tony Phillips gets back to business and offers some guidelines on capital investment
Page 13 
In my newspaper recently, I read about the chief executive of a hospital trust, responsible for a hospital in Kent, which was apparently so dirty and badly managed that approximately 90 people died from Clostridium difficile (C.difficile), contracted while being treated.
Mind you, the nurses also bear a great responsibility; I know they are rarely criticised in England, but, having recently spent some time in hospitals, I have first-hand experience that they are not all angels. While in a private wing of the NHS, it took me over four hours and some eight requests to get a dressing changed, while the young nurse on duty was busy gossiping about her trip to Hull for a wedding - not even her own.The chief executive in question resigned and was apparently eligible for some £250,000-£400,000 bonus pay-off - that is until Health Minister Alan Johnson intervened and ordered a withholding of any severance pay, pending legal advice. But it reflects exactly the topic I wrote about in August - namely, that the public sector and large companies have a totally different perception on what the term "bonus" means than we true, wealth-creating small companies. Meanwhile, we who fail in our own business pay a huge price for failure and could even lose our homes if the banks have taken our personal guarantee. Being responsible for the death of people being treated in hospital is, surely, far worse than the failure to pay a landlord rent, for example.Still, I suppose dead people do not give money to political parties, whereas large property companies may well contribute large sums. After all, what are a few deaths compared to a million-pound gift to party funds?Back to business. A few people write to me for advice and I even get the occasional phone call - including some from my managing director, Neville, when he wants to discuss any large capital investment. The problem is that, to me, £10 is large, while Neville's starting point is about £10,000! I guess that's just the age gap. My views on capital expenditure are very simple: justify the expenditure, measure the returns expected from the outlay and take cash flow into consideration. All business has a finite supply of money and the purchase of a machine can only be justified if it earns a return greater than any other conceivable use to which the money can be put. Theoretically, if you borrow money to buy a machine, it must earn more than the interest charged. But in practice, it must earn enough to pay both capital and interest over a minimum of three years or your cashflow could cause you problems. This should allow capital to accumulate for the purchase of the next machine and a five- or 10-year rolling programme is a good idea.We always try to replace equipment before it breaks down. But I have never understood why, when Neville and I discuss replacing something, it always breaks down within the next few weeks, before we have got the new equipment either ordered or delivered. I think it's called s*!'s law.



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