Finance.

The framework

1. 01

   Invested capital is not your balance sheet total.

   Invested capital is every dollar the operating business is actually using. Add operating working capital — receivables plus stock, less what you owe suppliers — to net fixed assets and to any intangibles you genuinely paid cash for. Then take out what is not operating: surplus cash sitting idle, the loan to a director, the property you happen to own. Run the sum off the balance-sheet bottom line instead and the answer reads high for a cash-rich business and low for one that has just paid for a fit-out. Build it once from your own accounts; it moves slowly, so you won't be doing this again next quarter.

2. 02

   Put operating profit over it, after the tax you actually paid and before any financing.

   The numerator is operating profit after the tax you actually paid and before a cent of interest. Interest comes out because the measure exists to show what the assets earn, not who funded them; leave financing in and a heavily borrowed business congratulates itself on capital it's merely renting. Use your genuine cash tax rate rather than the statutory one. Divide that figure by the invested capital you just built, and what you get is the rate of return on everything in the building. It is the first straight answer to whether this business deserves the money already inside it.

3. 03

   The number means nothing until you set it against what the money costs.

   A return isn't good or bad on its own; it is only good or bad against the cost of the capital that produced it — your blended cost of debt and the return your equity could have earned somewhere else. This module sets that bar properly in a later morning. For today, take your borrowing rate and add a margin for the risk your own money is carrying, and be honest rather than precise. The difference between the two numbers is the spread, and the spread is what you are actually in business to produce. Positive, growth compounds. Negative, growth is an accelerant.

4. 04

   The spread first, then the growth plan.

   The spread turns growth from an ambition into a conditional. Positive, and growth is the highest-value thing available to you; the question worth arguing about becomes how much more capital you can deploy at that return before it falls. Negative, and growth is not the remedy but the amplifier — every additional customer served at a losing return digs the hole deeper, and the correct sequence is to raise the return first, by lifting margin, by turning assets faster, or by shrinking the capital base until the numbers agree. Almost every plan you'll ever be handed opens at revenue instead.