Hopefully your business is growing, cash flow is strong, and if that is the case, what a fantastic scenario to be enjoying! Now, you must determine exactly what are the best ways 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 off debt with the incremental cash may be an alternative. Lastly, reinvesting into the business is a third alternative to improving the effectiveness of the organization.
The reinvestment of monies back into a company by means of capital are among the most prudent approaches to improve your business. Because I mentioned inside an earlier blog called Making Prudent Capital Investments, I discussed the various forms of capital from maintenance to discretionary. Inherent in the decision to reinvest needs to be a capital management process that directs the flow of capital not just in enhance returns, but minimizes budget mismanagement caused by “capital creep”.
Developing a series of procedures not only ensures that projects remain on budget, but that they also get prioritized from the best returning investments. It is possible to become a victim of investing capital only inside the “sexy” projects – i.e., new store builds, etc., but a solid capital management process should remove the bias of projects and solely spend money on the very best returning ones. By making use of the following guidelines, your capital management process can become more streamlined as well as position the business for greater financial growth.
Capital Process: Clearly articulating the process of capital management in your team is the best way to inspire fantastic ideas through the field. The top-liners are interacting with your core customers on a daily basis and more often than not, probably hold the best sense of what investments could be created to improve that experience. Therefore, educating your field staff on not only the process but the benefits of identifying opportunities for investment engages your team while enhancing productivity. Bubbling up ideas is just one step in the process but a crucial one. A field team that understands that the those who own the organization welcome their ideas and are willing to spend money on many of them, sends a proactive message for the team.
Capital Request Form (CRF): It might appear mundane to possess projects submitted using a Capital Request Form, but this is actually the initial step to figure out whether the project is really a “have to have” or a “want”. Identifying projects with business plans and expected financial targets inserts a layer of discipline into the whole process of capital investment. All too often, tips for investment forget to reach their targeted goals because the owner in the idea has not thought through the information on the request. This discipline of understanding the soft and hard costs from the project together with the expected margin uplift through the investment is definitely the only prudent approach to ensure success.
One Store Investment Model: So that you can project the possible upside of the capital investment, a monetary model ought to be created to tracks an investment versus the return. Most financial models include areas such as existing financials for comparison; net present worth of money; payback time periods; Internal Rates of Return (IRR); cost of capital; EBITDA projections, etc. Your CPA or business analyst must be able to produce a Proforma to your use that could allow you to add inside your specific metrics for each and every project. This discipline of benchmarking the project before a dollar is spent provides the necessary filter ahead of time when estimating the return on the proposed project.
Capital Projections: For larger organizations, creating a summary table for each of the concurrent projects not just keeps these projects on task, but helps to manage the entire cashflow in the business. The capital projections summary ought to be an excel spreadsheet that tracks investments by month/quarter/period for many capital investments. Generally, maintenance capital – an investment 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 – in order to carve the 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. Much like getting a general contractor to develop a property and including their cost in to the overall budget, allocating a share of the facility personnel as cap labor helps capture the whole investment. In certain larger organizations, facility personnel could be fully capitalized over a number of 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 no longer be needed at the company.
Capital investing provides tremendous upside towards the business whilst keeping the company growing for a long time. Prudent business owners 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.