Hopefully your business is growing, cash flow is strong, and if that is the situation, what a fantastic scenario to be enjoying! Now, you must determine exactly what are the best ways 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 off debt with the incremental cash may be an option. Lastly, reinvesting into the organization is a third substitute for improving the strength of the business.
The reinvestment of monies directly into an organization by means of capital are some of the most prudent ways to grow your business. When I mentioned in an earlier blog called Making Prudent Capital Investments, I discussed the different kinds of capital from maintenance to discretionary. Inherent in the choice to reinvest should be a capital management procedure that directs the flow of capital not just in enhance returns, but minimizes budget mismanagement due to “capital creep”.
Developing a number of procedures not only helps to ensure that projects remain budget, but which they get prioritized from the best returning investments. It is possible to become a victim of investing capital only within the “sexy” projects – i.e., new store builds, etc., but a good capital management process should remove the bias of projects and solely invest in the very best returning ones. By making use of the subsequent guidelines, your capital management process may 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 through the field. The front side-liners are getting together with your core customers on a daily basis and more often than not, probably have the best feeling of what investments could be created to improve that experience. Therefore, educating your field staff on not only 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 important one. A field team that recognizes that the those who own the company welcome their ideas and are able to put money into some of them, sends a proactive message to the team.
Capital Request Form (CRF): It may look mundane to possess projects submitted using a Capital Request Form, but this is the starting point to figure out whether the project is actually a “must have” or even a “want”. 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 fail to reach their targeted goals since the owner in the idea has not thought from the information on the request. This discipline of understanding the soft and hard costs in the project combined with expected margin uplift from the investment will be the only prudent method to ensure success.
One Store Investment Model: To be able to project the possibility upside of a 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 time periods; Internal Rates of Return (IRR); price of capital; EBITDA projections, etc. Your CPA or business analyst should be able to develop a Proforma to your use that would allow you to add within your specific metrics for each 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 merely keeps these projects on task, but helps to manage the general cashflow of 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 expense of staying in business – doesn’t expect a return on the dollars spent. Therefore, the summary ought to be broken into cwwdvb varieties of capital – maintenance and discretionary – so that you can carve the discretionary expenditures for Return On Investments (ROI) purposes.
Cap Labor Worksheet: Lastly, capitalizing some of the human labor involved in capital projects helps capture the “fully-loaded” cost of the project. Much like hiring a general contractor to construct a home and including their cost into the overall budget, allocating a portion of the facility personnel by means of cap labor helps capture the entire investment. In certain larger organizations, facility personnel may be fully capitalized over numerous projects without their cost of salary and benefits hitting the G & A expense line. Said yet another way, if there have been no capital investments, the facility person may no longer be needed at the company.
Capital investing provides tremendous upside towards the business and keep the organization growing for many years. Prudent business people which have worked extremely difficult to generate revenues and profits should not provide away through shoddy capital management. Rather, continual growth could be attained by instilling discipline into their capital procedures.