Allocate Funds to Benefit Business

In the pursuit of profit, expense management is as important as revenue generation. When examining the need and purpose of an expense, big or small, the larger framework of the business should be considered . Each expense should be evaluated in terms of the benefits derived from the spending, and the benefits should always relate back to the strategic vision of the company.

Furthermore, the benefit should correlate to the companys overall view of business. We prefer to build long-standing business relationships rather than to pursue opportunistic marketeering. Our Sales, General, and Administrative budgeting is shaped by this principle. For example, our company holds a number of important patents related to our product offerings. The expense of initially procuring these patents is high and pursuing infringers is often very costly; however, these expenses make sense for us in light of our business strategy. For a company that is more of an opportunistic marketer, and less interested in long- term products, this would clearly be an unnecessary expense.

Research and development spending, based on the aforementioned product selection criteria, is the lifeblood of future growth. We strive to provide our creative and engineering groups with the human and capital resources needed to explore new ideas and innovations. As always, we must also determine the relevance of these expenses to our overall strategy. Consequently, it is essential for management to monitor research and development activities to ascertain the applicability of the efforts to the companys business model.

One must be constantly mindful of the dangers of expense creep. During the early years of any business, when every penny counts, we constantly count the pennies. This is a discipline that must be maintained even in the very best of times. In recent years we have consistently produced outstanding operating results, including gross margins of 75%, operating margins of 35% or better, and net income exceeding 25%. All of this has been achieved while spending 11%-14% of revenue on Research and Development. EBITDA has reached a level of over 50% of revenue and free cash over 30% of revenue. Although we have a business model that allows for very good returns, none of this could have been achieved had we allowed ourselves to spend to the top line rather than being careful of the bottom line. Again, every expense should tie back to the central strategy of the business. If an expense, no matter how seemingly small, cannot be justified in this way, do not spend it.