Hopefully your business is growing, cashflow is strong, and if that is the situation, what a fantastic scenario to be enjoying! Now, you have to determine do you know 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 down debt with the incremental cash may be a choice. Lastly, reinvesting into the company is a third option to improving the potency of the company.
The reinvestment of monies back to an organization by means of capital are the most prudent ways to increase your business. As I mentioned within an earlier blog called Making Prudent Capital Investments, I discussed the many kinds of capital from maintenance to discretionary. Built into the choice to reinvest should be a capital management process that directs the flow of capital not just in enhance returns, but minimizes budget mismanagement brought on by “capital creep”.
Developing a number of procedures not just ensures that projects stay on budget, but which they also get prioritized from the best returning investments. You can easily fall victim to investing capital only in the “sexy” projects – i.e., new store builds, etc., but an excellent capital management process should remove the bias of projects and solely invest in the most effective returning ones. Through the use of these guidelines, your capital management process could become more streamlined in addition to position the business for greater financial growth.
Capital Process: Clearly articulating the whole process of capital management for your team is the easiest method to inspire fantastic ideas from your field. The front-liners are getting together with your core customers on a daily basis and most of the time, probably hold the best sense of what investments might be designed to improve that experience. Therefore, educating your field staff on not just the process but the advantages 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 understands that the owners of the business welcome their ideas and are prepared to invest in a number of them, sends a proactive message to the team.
Capital Request Form (CRF): It may look mundane to have projects submitted with a Capital Request Form, but this is actually the starting point to determine whether the project is really a “must have” or 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 forget to reach their targeted goals since the owner of the idea has not thought from the specifics of the request. This discipline of understanding both the soft and hard costs in the project combined with the expected margin uplift from your investment is definitely the only prudent method to ensure success.
One Store Investment Model: So that you can project the possible upside of the capital investment, an economic model should be designed to tracks an 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 develop a Proforma to your use that would let you 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, developing a summary table for each of the concurrent projects not merely keeps these projects on task, but really helps to manage the overall income in the business. The capital projections summary ought to be an excel spreadsheet that tracks investments by month/quarter/period for all capital investments. Generally, maintenance capital – the investment cost 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 a number of the human labor involved with capital projects helps capture the “fully-loaded” price of the project. Similar to getting a general contractor to develop a property and including their cost to the overall budget, allocating a portion of your facility personnel by means of cap labor helps capture the entire investment. In some larger organizations, facility personnel may be fully capitalized over several projects without their cost of salary and benefits showing up in the G & A expense line. Said another way, if there was no capital investments, the facility person may no longer be needed at the company.
Capital investing can offer tremendous upside for the business whilst keeping the business growing for a long time. Prudent company owners who have worked extremely hard to generate revenues and profits must not provide away through shoddy capital management. Rather, continual growth can be attained by instilling discipline to their capital procedures.