Hopefully your company is growing, cash flow is strong, and if that is the situation, what a fantastic scenario to be enjoying! Now, one must determine do you know the ideal way 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 the businesses, paying down debt with the incremental cash may be an alternative. Lastly, reinvesting back into the company is a third alternative to improving the potency of the company.
The reinvestment of monies back to a business as capital are among the most prudent methods to grow your business. As I mentioned in an earlier blog called Making Prudent Capital Investments, I discussed the different types of capital from maintenance to discretionary. Built into the choice to reinvest ought to be a capital management procedure that directs the flow of capital not just in enhance returns, but minimizes budget mismanagement brought on by “capital creep”.
Developing a series of procedures not just ensures that projects remain on budget, but which they get prioritized by 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 an excellent capital management process should get rid of the bias of projects and solely put money into the most effective returning ones. Through the use of the following guidelines, your capital management process could become more streamlined along with position the business for greater financial growth.
Capital Process: Clearly articulating the process of capital management in your team is the simplest way to inspire fantastic ideas from your field. The front side-liners are interacting with your core customers on a daily basis and generally, probably hold 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 benefits of identifying opportunities for investment engages your team while enhancing productivity. Bubbling up ideas is simply one step along the way but a crucial one. An industry team that understands that the owners of the company welcome their ideas and are able to spend money on many of them, sends a proactive message towards the team.
Capital Request Form (CRF): It might appear mundane to have projects submitted with a Capital Request Form, but this is the initial step to find out whether the project is a “need to have” or even a “want to have”. Identifying projects with business plans and expected financial targets inserts a layer of discipline into the process of capital investment. All too often, tips for investment fail to reach their targeted goals because the owner of the idea has not thought from the specifics of the request. This discipline of understanding both soft and hard costs of the project combined with expected margin uplift from the investment is the only prudent approach to ensure success.
One Store Investment Model: To be able to project the potential upside of the capital investment, an economic model needs to be built to tracks an 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); price of capital; EBITDA projections, etc. Your CPA or business analyst will be able to create a Proforma for the use that would allow you to add inside your specific metrics for each project. This discipline of benchmarking the project before a dollar is spent offers the necessary filter in advance when estimating the return on the proposed project.
Capital Projections: For larger organizations, making a summary table for all the concurrent projects not only keeps these projects on task, but helps you to manage the general 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 – your time and money cost of remaining 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 number of the human labor involved in capital projects helps capture the “fully-loaded” expense of the project. Much like hiring a general contractor to build a home and including their cost in to 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 may be fully capitalized over numerous projects without their price of salary and benefits showing up in the G & A expense line. Said one other way, if there was no capital investments, the facility person may not be needed in the company.
Capital investing can offer tremendous upside to the business whilst keeping the business growing for many years. Prudent business owners which have worked extremely difficult to generate revenues and profits should never give it away through shoddy capital management. Rather, continual growth can be attained by instilling discipline into their capital procedures.