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 use. 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 into the company is a third option to improving the strength of the organization.
The reinvestment of monies directly into a company by means of capital are among the most prudent methods to improve your business. As I mentioned within 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 method that directs the flow of capital not only to enhance returns, but minimizes budget mismanagement due to “capital creep”.
Developing a series of procedures not merely helps to ensure that projects remain on budget, but that they get prioritized from the best returning investments. You can easily become a victim of investing capital only within the “sexy” projects – i.e., new store builds, etc., but a solid capital management process should eliminate the bias of projects and solely invest in the best returning ones. Through the use of the following guidelines, your capital management process could become more streamlined in addition to position the organization for greater financial growth.
Capital Process: Clearly articulating the entire process of capital management to your team is the easiest method to inspire fantastic ideas through the field. The front side-liners are getting together with your core customers on a regular basis and generally, probably have the best feeling of what investments may be created to improve that experience. Therefore, educating your field staff on not just the procedure but the advantages of identifying opportunities for investment engages your team while enhancing productivity. Bubbling up ideas is just one step during this process but an essential one. An industry team that recognizes that the those who own the company welcome their ideas and are willing to invest in a number of them, sends a proactive message towards the team.
Capital Request Form (CRF): It may look mundane to possess projects submitted having a Capital Request Form, but this is actually the initial step to figure out if the project is really a “must have” or a “want”. Identifying projects with business plans and expected financial targets inserts a layer of discipline into the process of capital investment. Very often, tips for investment forget to reach their targeted goals because the owner in the idea has not thought from the details of the request. This discipline of understanding both soft and hard costs from the project together with the expected margin uplift through the investment will be the only prudent approach to ensure success.
One Store Investment Model: In order to project the potential upside of any capital investment, an economic model ought to be designed to tracks the investment versus the return. Most financial models include areas including existing financials for comparison; net present value of money; payback periods of time; Internal Rates of Return (IRR); expense of capital; EBITDA projections, etc. Your CPA or business analyst must be able to develop a Proforma for the use that could let you add inside your specific metrics for every project. This discipline of benchmarking the project before a dollar is spent supplies the necessary filter ahead of time when estimating the return on the proposed project.
Capital Projections: For larger organizations, developing a summary table for all the concurrent projects not merely keeps these projects on task, but really helps to manage the general cash flow from the business. The capital projections summary ought to be an excel spreadsheet that tracks investments by month/quarter/period for all capital investments. Generally, maintenance capital – the investment cost of staying in business – doesn’t expect a return on the dollars spent. Therefore, the summary should be broken into cwwdvb varieties of capital – maintenance and discretionary – so that you can carve out your discretionary expenditures for Return On Investments (ROI) purposes.
Cap Labor Worksheet: Lastly, capitalizing a few of the human labor associated with capital projects helps capture the “fully-loaded” expense of the project. Similar to employing a general contractor to construct a home and including their cost in to the overall budget, allocating a share of the facility personnel in the form of cap labor helps capture the whole investment. In some larger organizations, facility personnel may be fully capitalized over a number of projects without their expense of salary and benefits striking the G & A expense line. Said another way, if there was no capital investments, the facility person may not be needed at the company.
Capital investing can provide tremendous upside to the business whilst keeping the company growing for many years. Prudent company owners that have worked extremely difficult to generate revenues and profits should never provide away through shoddy capital management. Rather, continual growth can be attained by instilling discipline within their capital procedures.