Hopefully your enterprise is growing, cashflow is strong, and if that is the case, what a fantastic scenario to be enjoying! Now, one must determine do you know the ideal way 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 an alternative. Lastly, reinvesting into the organization is a third alternative to improving the strength of the company.
The reinvestment of monies back into a business as capital are some of the most prudent ways to improve your business. Because I mentioned in an earlier blog called Making Prudent Capital Investments, I discussed the many kinds of capital from maintenance to discretionary. Built into 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 brought on by “capital creep”.
Developing a series of procedures not only makes sure that projects stay on budget, but which they also get prioritized through the best returning investments. It is possible to fall victim to investing capital only within the “sexy” projects – i.e., new store builds, etc., but a good capital management process should eliminate the bias of projects and solely spend money on the most effective returning ones. By making use of the following guidelines, your capital management process can become more streamlined as well as position the company for greater financial growth.
Capital Process: Clearly articulating the process of capital management for your team is the easiest method to inspire fantastic ideas from the field. The front-liners are getting together with your core customers on a daily basis and most of the time, probably hold the best feeling of what investments might be made to improve that experience. Therefore, educating your field staff on not just this process but some great benefits of identifying opportunities for investment engages your team while enhancing productivity. Bubbling up ideas is just one step along the way but an important one. An industry team that recognizes that the those who own the company welcome their ideas and are able to invest in 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 starting point to determine if the project is actually 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. Much too often, suggestions for investment fail to reach their targeted goals since the owner from the idea has not yet thought through the specifics of the request. This discipline of understanding both the soft and hard costs from the project combined with the expected margin uplift through the investment is the only prudent way to ensure success.
One Store Investment Model: So that you can project the potential upside of a capital investment, a monetary model needs to be designed to tracks an investment versus the return. Most financial models include areas including existing financials for comparison; net present price of money; payback periods of time; Internal Rates of Return (IRR); expense of capital; EBITDA projections, etc. Your CPA or business analyst must be able to produce a Proforma for the use that would enable you to add in your specific metrics for each and every project. This discipline of benchmarking the project before a dollar is spent offers the necessary filter in advance 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 you to manage the entire cash flow of the business. The capital projections summary needs to be an excel spreadsheet that tracks investments by month/quarter/period for those capital investments. Generally, maintenance capital – the investment expense of residing 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 – to be able to carve out your discretionary expenditures for Return On Investments (ROI) purposes.
Cap Labor Worksheet: Lastly, capitalizing a few of the human labor involved in capital projects helps capture the “fully-loaded” price of the project. Just like getting a general contractor to construct a house and including their cost in to the overall budget, allocating a share of your facility personnel by means of cap labor helps capture the complete investment. In some larger organizations, facility personnel may be fully capitalized over a number of projects without their price of salary and benefits striking the G & A expense line. Said one other way, if there were no capital investments, the facility person may no longer be needed on the company.
Capital investing can provide tremendous upside for the business while keeping the company growing for many years. Prudent company owners that have worked extremely difficult to generate revenues and profits should not give it away through shoddy capital management. Rather, continual growth can be attained by instilling discipline within their capital procedures.