Hopefully your business is growing, cash flow is strong, and if that is the case, what a fantastic scenario to be enjoying! Now, one must determine exactly what are the guidelines on how to put those earnings to make use of. 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 an option. Lastly, reinvesting into the company is a third alternative to improving the effectiveness of the business.
The reinvestment of monies back to a business as capital are some of the most prudent methods to improve your business. When I mentioned within an earlier blog called Making Prudent Capital Investments, I discussed the different types of capital from maintenance to discretionary. Inherent in the choice to reinvest needs to be a capital management process 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 just helps to ensure that projects stay on budget, but they will also get prioritized through the best returning investments. It is possible to fall victim to investing capital only inside the “sexy” projects – i.e., new store builds, etc., but a good capital management process should get rid of the bias of projects and solely invest in the best returning ones. Through the use of the subsequent guidelines, your capital management process can become more streamlined along with 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 your field. The front side-liners are getting together with your core customers every day and generally, probably possess the best sensation of what investments may be made to improve that experience. Therefore, educating your field staff on not only the procedure but the benefits of identifying opportunities for investment engages your team while enhancing productivity. Bubbling up ideas is simply one step during this process but an important one. A field team that understands that the those who own the organization welcome their ideas and are willing to invest in many of them, sends a proactive message to the team.
Capital Request Form (CRF): It may seem mundane to get projects submitted having a Capital Request Form, but this is the first step to determine whether the project is really a “must 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. Very often, suggestions for investment neglect to reach their targeted goals because the owner in the idea has not yet thought with the information on the request. This discipline of understanding the soft and hard costs from the project combined with expected margin uplift through the investment will be the only prudent method to ensure success.
One Store Investment Model: To be able to project the potential upside of any capital investment, an economic model should be created to tracks your time and money versus the return. Most financial models include areas including existing financials for comparison; net present value of money; payback time periods; Internal Rates of Return (IRR); cost of capital; EBITDA projections, etc. Your CPA or business analyst will be able to develop a Proforma to your use that would let you add in your specific metrics for 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, developing a summary table for all the concurrent projects not only keeps these projects on task, but helps you to manage the overall income in 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 – an investment cost of remaining in business – doesn’t expect a return on the dollars spent. Therefore, the summary needs to 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 number of the human labor associated with capital projects helps capture the “fully-loaded” expense of the project. Similar to getting a general contractor to develop a home and including their cost in to the overall budget, allocating a portion of the facility personnel by means of cap labor helps capture the complete investment. In some larger organizations, facility personnel may be fully capitalized over a number of projects without their cost of salary and benefits striking the G & A expense line. Said another way, if there have been no capital investments, the facility person may not be needed at the company.
Capital investing can provide tremendous upside towards the business while keeping the organization growing for a long time. Prudent business owners which have worked extremely difficult to generate revenues and profits should never provide it with away through shoddy capital management. Rather, continual growth could be attained by instilling discipline to their capital procedures.