Hopefully your business is growing, cashflow is strong, and if that is the situation, what a fantastic scenario to be enjoying! Now, one must determine what are the best ways to put those earnings to utilize. For the “live for the moment” entrepreneur, one could simply enjoy their profits and pull money out of the company for their own personal fun! For those owners that carry debt on their businesses, paying down debt with the incremental cash may be a choice. Lastly, reinvesting into the business is a third substitute for improving the strength of the company.
The reinvestment of monies back into a business in the form of capital are some of the most prudent approaches to increase your business. When I mentioned in an earlier blog called Making Prudent Capital Investments, I discussed the various types of capital from maintenance to discretionary. Built into the decision to reinvest ought to be a capital management process that directs the flow of capital not just to enhance returns, but minimizes budget mismanagement due to “capital creep”.
Developing a series of procedures not only makes sure that projects remain on budget, but they will also get prioritized by the best returning investments. You can easily become a victim of investing capital only in the “sexy” projects – i.e., new store builds, etc., but a good capital management process should remove the bias of projects and solely put money into the most effective returning ones. Through the use of the subsequent guidelines, your capital management process can become more streamlined as well as position the organization for greater financial growth.
Capital Process: Clearly articulating the whole process of capital management to your team is the best way to inspire fantastic ideas from the field. The front side-liners are getting together with your core customers on a regular basis and most of the time, probably have the best sensation of what investments could be made to improve that experience. Therefore, educating your field staff on not merely the procedure but the advantages of identifying opportunities for investment engages your team while enhancing productivity. Bubbling up ideas is only one step during this process but a crucial one. An industry team that understands that the those who own the organization welcome their ideas and are able to spend money on a number of them, sends a proactive message for the team.
Capital Request Form (CRF): It may look mundane to have projects submitted using a Capital Request Form, but here is the first step to find out if the project is really a “have to have” or a “want to have”. Identifying projects with business plans and expected financial targets inserts a layer of discipline into the entire process of capital investment. Much too often, suggestions for investment fail to reach their targeted goals because the owner from the idea has not yet thought from the information on the request. This discipline of understanding both the soft and hard costs in the project combined with the expected margin uplift through the investment is the only prudent approach to ensure success.
One Store Investment Model: To be able to project the potential upside of any capital investment, a monetary model needs to be designed to tracks your time and money versus the return. Most financial models include areas including existing financials for comparison; net present worth of money; payback time periods; Internal Rates of Return (IRR); price of capital; EBITDA projections, etc. Your CPA or business analyst should be able to produce a Proforma for your use that will allow you to add within your specific metrics for every project. This discipline of benchmarking the project before a dollar is spent supplies the necessary filter beforehand when estimating the return on the proposed project.
Capital Projections: For larger organizations, making a summary table for all the concurrent projects not merely keeps these projects on task, but helps to manage the entire income in the business. The capital projections summary ought to be an excel spreadsheet that tracks investments by month/quarter/period for those capital investments. Generally, maintenance capital – the investment price of staying in business – doesn’t expect a return on the dollars spent. Therefore, the summary ought to be broken into cwwdvb types of capital – maintenance and discretionary – so that you can carve the discretionary expenditures for Return On Investments (ROI) purposes.
Cap Labor Worksheet: Lastly, capitalizing a number of the human labor associated with capital projects helps capture the “fully-loaded” cost of the project. Much like getting a general contractor to construct a house and including their cost into the overall budget, allocating a share of your own facility personnel as cap labor helps capture the whole investment. In some larger organizations, facility personnel could be fully capitalized over a number of projects without their expense of salary and benefits striking the G & A expense line. Said one other way, if there were no capital investments, the facility person may not be needed on the company.
Capital investing can provide tremendous upside to the business whilst keeping the company growing for a long time. Prudent company owners who have worked extremely hard to generate revenues and profits should never give it away through shoddy capital management. Rather, continual growth may be attained by instilling discipline within their capital procedures.