Hopefully your business is growing, cashflow is strong, and if that is the situation, what a fantastic scenario to be enjoying! Now, you must determine do you know the guidelines on how 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 off debt with the incremental cash may be a choice. Lastly, reinvesting back into the organization is a third alternative to improving the strength of the business.
The reinvestment of monies directly into a company by means of capital are some of the most prudent methods to increase your business. As I mentioned in an earlier blog called Making Prudent Capital Investments, I discussed the various kinds of capital from maintenance to discretionary. Inherent in the choice to reinvest needs to be a capital management procedure that directs the flow of capital not just in enhance returns, but minimizes budget mismanagement caused by “capital creep”.
Developing a number of procedures not just helps to ensure that projects stay on budget, but which they will also get prioritized by the best returning investments. It is easy to fall victim to investing capital only inside the “sexy” projects – i.e., new store builds, etc., but a solid capital management process should eliminate the bias of projects and solely spend money on the very best returning ones. By making use of the subsequent guidelines, your capital management process could become more streamlined as well as position the organization for greater financial growth.
Capital Process: Clearly articulating the process of capital management to your team is the best way to inspire fantastic ideas from your field. The front-liners are getting together with your core customers every day and more often than not, probably hold the best sense of what investments may be created to improve that experience. Therefore, educating your field staff on not just the process but some great benefits of identifying opportunities for investment engages your team while enhancing productivity. Bubbling up ideas is just one step in the process but an essential one. An industry team that recognizes that the people who own the business welcome their ideas and are able to put money into a number of them, sends a proactive message to the team.
Capital Request Form (CRF): It may seem mundane to have projects submitted using a Capital Request Form, but this is actually the first step to determine if the project is a “have to have” or even 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. All too often, tips for investment neglect to reach their targeted goals as the owner in the idea has not thought through the specifics of the request. This discipline of understanding the soft and hard costs from the project together with the expected margin uplift from your investment will be the only prudent method to ensure success.
One Store Investment Model: In order to project the possibility upside of a capital investment, an economic 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 price of money; payback periods of time; Internal Rates of Return (IRR); cost of capital; EBITDA projections, etc. Your CPA or business analyst will be able to create a Proforma to your use that will allow you to add in your specific metrics for each and every project. This discipline of benchmarking the project before a dollar is spent offers the necessary filter ahead of time when estimating the return on the proposed project.
Capital Projections: For larger organizations, making a summary table for all of the concurrent projects not just keeps these projects on task, but really helps to manage the general cashflow of the business. The capital projections summary needs to be an excel spreadsheet that tracks investments by month/quarter/period for those capital investments. Generally, maintenance capital – the investment cost of staying in business – doesn’t expect a return on the dollars spent. Therefore, the summary needs to be broken into cwwdvb types of capital – maintenance and discretionary – to be able to carve the discretionary expenditures for Return On Investments (ROI) purposes.
Cap Labor Worksheet: Lastly, capitalizing a number of the human labor involved with capital projects helps capture the “fully-loaded” price of the project. Similar to hiring a general contractor to construct a home and including their cost in to the overall budget, allocating a percentage of your own facility personnel as cap labor helps capture the entire investment. In certain larger organizations, facility personnel may be fully capitalized over several projects without their cost of salary and benefits striking the G & A expense line. Said another way, if there was no capital investments, the facility person may no longer be needed in the company.
Capital investing can provide tremendous upside for the business whilst keeping the company growing for years to come. Prudent business people that have worked extremely difficult to generate revenues and profits should not provide it with away through shoddy capital management. Rather, continual growth can be attained by instilling discipline within their capital procedures.