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 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 the businesses, paying off debt with the incremental cash may be a choice. Lastly, reinvesting back into the organization is a third alternative to improving the strength of the organization.
The reinvestment of monies directly into a business in the form of capital are among the most prudent ways to improve your business. Because I mentioned within an earlier blog called Making Prudent Capital Investments, I discussed the different forms of capital from maintenance to discretionary. Inherent in the decision to reinvest needs to 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 merely makes sure that projects remain on budget, but that they get prioritized by the best returning investments. It is easy to become a victim of investing capital only in 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. By utilizing the subsequent guidelines, your capital management process may become more streamlined as well as position the business for greater financial growth.
Capital Process: Clearly articulating the entire process of capital management for your team is the best way to inspire fantastic ideas from the field. The front-liners are interacting with your core customers on a daily basis and generally, probably possess the best feeling of what investments could be designed 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 simply one step in the process but an essential one. An industry team that recognizes that the owners of the organization welcome their ideas and are willing to put money into many of them, sends a proactive message towards the team.
Capital Request Form (CRF): It might appear mundane to possess projects submitted using a Capital Request Form, but here is the first step to determine whether or not the project is really a “need to have” or perhaps 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, suggestions for investment forget to reach their targeted goals since the owner in the idea has not yet thought with the information on the request. This discipline of understanding both soft and hard costs in the project combined with expected margin uplift from the investment is the only prudent method to ensure success.
One Store Investment Model: In order to project the possibility upside of any capital investment, a monetary model needs to be designed 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 periods of time; Internal Rates of Return (IRR); cost of capital; EBITDA projections, etc. Your CPA or business analyst will be able to produce a Proforma for the use that would allow you to add inside your specific metrics for every project. This discipline of benchmarking the project before a dollar is spent supplies the necessary filter beforehand when estimating the return on the proposed project.
Capital Projections: For larger organizations, developing a summary table for each of the concurrent projects not merely keeps these projects on task, but helps you to manage the entire cash flow from the business. The capital projections summary should be an excel spreadsheet that tracks investments by month/quarter/period for many capital investments. Generally, maintenance capital – an investment expense of remaining in business – doesn’t expect a return on the dollars spent. Therefore, the summary should be broken into cwwdvb kinds of capital – maintenance and discretionary – to be able to carve out 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” expense of the project. Much like hiring a general contractor to develop a property and including their cost in to the overall budget, allocating a percentage of your facility personnel in the form of cap labor helps capture the entire investment. In certain larger organizations, facility personnel could be fully capitalized over numerous projects without their price of salary and benefits striking the G & A expense line. Said yet another way, if there was no capital investments, the facility person may no longer be needed on the company.
Capital investing can provide tremendous upside to the business whilst keeping the organization growing for a long time. Prudent business owners who have worked extremely difficult to generate revenues and profits must not provide away through shoddy capital management. Rather, continual growth could be attained by instilling discipline to their capital procedures.