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 do you know the guidelines on how to put those earnings to use. 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 into the business is a third alternative to improving the effectiveness of the business.
The reinvestment of monies back to a business in the form of capital are some of the most prudent ways to increase your business. As I mentioned inside an earlier blog called Making Prudent Capital Investments, I discussed the many forms of capital from maintenance to discretionary. Built into the decision to reinvest needs to be a capital management method that directs the flow of capital not only to enhance returns, but minimizes budget mismanagement brought on by “capital creep”.
Developing a series of procedures not only ensures that projects remain on budget, but which they get prioritized from the best returning investments. You can easily 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 put money into the most effective returning ones. By making 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 the field. The front side-liners are getting together with your core customers every day and most of the time, probably have the best sensation of what investments may be created to improve that experience. Therefore, educating your field staff on not merely the process but some great 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. An industry team that recognizes that the people who own the company welcome their ideas and are prepared to put money into a number of them, sends a proactive message to the team.
Capital Request Form (CRF): It may seem mundane to possess projects submitted using a Capital Request Form, but this is the first step to figure out if the project is really a “have to have” or perhaps a “want to have”. Identifying projects with business plans and expected financial targets inserts a layer of discipline into the whole process of capital investment. All too often, suggestions for investment forget to reach their targeted goals because the owner of the idea has not yet thought through the details of the request. This discipline of understanding both the soft and hard costs in the project together with the expected margin uplift through the investment is definitely the only prudent method to ensure success.
One Store Investment Model: So that you can project the possible upside of a capital investment, an economic model should be designed to tracks the investment versus the return. Most financial models include areas such as existing financials for comparison; net present price 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 create a Proforma for your use that would enable 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, making a summary table for each of the concurrent projects not just keeps these projects on task, but really helps to manage the overall cashflow in the business. The capital projections summary should be an excel spreadsheet that tracks investments by month/quarter/period for all capital investments. Generally, maintenance capital – the investment price of staying 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 – so that you can 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” price of the project. Similar to employing a general contractor to construct a home and including their cost in to the overall budget, allocating a portion of your own facility personnel by means of cap labor helps capture the whole investment. In certain larger organizations, facility personnel may be fully capitalized over a number of projects without their expense of salary and benefits hitting 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 offer tremendous upside towards the business and keep the organization growing for a long time. Prudent business owners who have worked extremely difficult to generate revenues and profits should not give it away through shoddy capital management. Rather, continual growth may be attained by instilling discipline into their capital procedures.