Why A Seldom Used Ratio Is Now Defining The Strongest Financial Strategies

While contraction and layoffs may be inescapable, there are avenues to capital, and ultimately revenue, which are drastically underutilized.

I don’t know if there’s anyone who gets pitched more than the CFO. New technologies, new dashboards, new concepts (my personal favorite right now is EBITDAC) — everyone seems to have a bullseye squarely around the job title, “Chief Financial Officer.” I have often marveled at how the brilliant and talented CFOs with whom I have been privileged to work during my career have managed to sort through the maelstrom to fulfill their responsibility as the head of all things finance.

Certainly, the most effective CFOs have the ability to separate the signal from the noise. Which is why more and more of the most prominent CFOs are honing in on something called “The Golden Ratio.”

In the cosmetic, metaphysical, and classical architectural worlds, the Golden Ratio is represented as the greek letter Phi and constitutes what has often been considered a sacred ratio of divine perfection. From Britannica: “The Golden ratio, also known as the golden section, golden mean, or divine proportion, in mathematics, the irrational number (1 + Square root of√5)/2, often denoted by the Greek letter ϕ or τ, which is approximately equal to 1.618.”

In modern economics, The Golden Ratio is both a lot simpler and less mystical – the Golden Ratio of modern economics is the ratio of Tax Credits & Incentives an organization has monetized relative to their total qualified expenditures (often the total amount of Capital Expenditure is proxied in to the denominator.)

C&I in $/ CapEx in $ = the Golden Ratio.

And that number should be at least ¼ for your organization. That is to say 25% of your CapEx should be paid for by C&I.

Unfortunately, too many companies not only fail to reach this critical benchmark…they don’t even know their C&I portfolio value, much less its monetization coefficient relative to qualified expenditures.

Weaponizing Every Department in the War on Covid

As the medical catastrophes of Covid manifest into greater and greater economic problems, most CFOs have been forced to look at emergency measures to keep their business afloat. Largely that has meant significant furloughs, layoffs and pay cuts mixed with dramatically reduced capital expenditure plans. Other companies have successfully secured additional capital in the form of loans. And while there are a few industries out there experiencing tremendous growth despite the down economy, the majority are conceptually in “contract and survive” mode.

Respectfully, I would challenge that strategy. While contraction and layoffs may be inescapable, certainly there are avenues to capital and ultimately revenue, which are underutilized. Moreover, there are existing departments in your company which are lying dormant, waiting to be activated as revenue generators rather than cost centers.

I believe there is no greater example of such a department than the Tax Department.

Leave No Stone Unturned

C&I started to emerge in prevalence during the 1970’s and 80’s as the growing reality of globalization began to raise new questions for local, state, and federal governments vying for the activity created by good business. Today, more than $1.4 trillion per annum in statutory and negotiated C&I is made available in the US alone. For comparison’s sake, the total value of all PPP loans is sitting at about $600B – a little more than a third the size of the US C&I market. Take this excerpt from a 2020 South Carolina report on C&I in the state:

“ [One SC program] approvals included up to nearly $6.2 billion in potentially reimbursable eligible costs with $223 million actually claimed.”

That constitutes all of a 3.6% conversion on one program in one state in one country. Imagine what else is out there.

Every industry has significant C&I available in multiple US States and globally, like in the EU. Manufacturing, tourism, film, technology, energy — C&I is a tangible part of all 50 states’ economic development plans. Researching C&I can be a bit arduous, but generally, you can find partial lists of state C&I packages by searching state economic sites — take Arkansas, for example.

From a strategic level, the first goal of any organization looking to grow their C&I portfolio is to get a hold on what they actually have. You may think the answer is negligible but I would strongly encourage you to go through the process — likely, the final number will surprise you.

The second goal is to integrate C&I into strategic and financial planning. This is where the rubber meets the road as the discussion of a new factory should include a discussion into available C&I. Whether that means you do your own research, use a technology, or rely on an advisor is up to you — but paying heed to C&I at the planning level is a critical paradigm shift for any corporation looking to integrate this excellent asset.

Not only have thousands of organizations ranging from 2 employees to 2 million employees used C&I to reach their goals, entire industries have been built off of C&I.

Any organization with capital expenditure projects should be incorporating C&I into their CapEx stack with a goal towards reaching the 25% standard of The Golden Ratio. Manufacturers, production companies, transportation companies, retailers, real estate – those are the obvious ones. Then of course, there is the now-permanent Federal R&D Tax Credit which can play a huge role in bridging the gap between research and commercial viability for many different industries, most notably biotech, technology, medical, and energy.

Only 4% of companies know the value of their Golden Ratio, which is another way of saying that 96% of companies are blind as to the value of an asset which is regularly in the 8 figures, even for SMBs. Credits & Incentives are unlike other assets in that they are both complicated to monetize and that they are intrinsically tethered to pro-societal goals like job creation, environmental remediation, and economic justice. That’s why I call it the Lynchpin Asset and why I believe C&I will play a critical role in the revitalization and restoration of the US Economy at large. From a cold hard business perspective, the rationale behind C&I is even simpler:

If you don’t have a real C&I strategy at your organization, then you are leaving millions, if not billions, on the table.