Hopefully your company is growing, cashflow 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 their businesses, paying off debt with the incremental cash may be an alternative. Lastly, reinvesting back into the organization is a third option to improving the strength of the business.
The reinvestment of monies back to an organization as capital are among the most prudent approaches to increase your business. Because I mentioned within an earlier blog called Making Prudent Capital Investments, I discussed the different kinds of capital from maintenance to discretionary. Inherent in the choice to reinvest needs to be a capital management method that directs the flow of capital not only to enhance returns, but minimizes budget mismanagement due to “capital creep”.
Developing a series of procedures not merely helps to ensure that projects remain on budget, but they 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 an excellent capital management process should remove the bias of projects and solely spend money on the best returning ones. By utilizing these guidelines, your capital management process can become more streamlined along with position the organization for greater financial growth.
Capital Process: Clearly articulating the whole process of capital management for your team is the simplest way to inspire fantastic ideas from the field. The front-liners are interacting with your core customers on a regular basis and generally, probably hold the best feeling of what investments may be created 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 only one step along the way but an essential one. An industry team that recognizes that the people who own the business welcome their ideas and are willing to invest in some of them, sends a proactive message to the team.
Capital Request Form (CRF): It might appear mundane to possess projects submitted with a Capital Request Form, but this is the initial step to determine if the project is a “must have” or 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. Much too often, ideas for investment neglect to reach their targeted goals as the owner in the idea has not yet thought with the specifics of the request. This discipline of understanding both the soft and hard costs in the project combined with the expected margin uplift through the investment is the only prudent method to ensure success.
One Store Investment Model: To be able to project the potential upside of any capital investment, a monetary model ought to be built to tracks an investment versus the return. Most financial models include areas like existing financials for comparison; net present worth of money; payback time periods; Internal Rates of Return (IRR); expense of capital; EBITDA projections, etc. Your CPA or business analyst should be able to create a Proforma for your use that will enable you to add in 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 all of the concurrent projects not just keeps these projects on task, but helps you to manage the general income 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 – an investment price of staying in business – doesn’t expect a return on the dollars spent. Therefore, the summary ought to be broken into cwwdvb types of capital – maintenance and discretionary – so that you can carve out your discretionary expenditures for Return On Investments (ROI) purposes.
Cap Labor Worksheet: Lastly, capitalizing some of the human labor involved with capital projects helps capture the “fully-loaded” price of the project. Just like employing a general contractor to construct a property and including their cost in to the overall budget, allocating a portion of your facility personnel as cap labor helps capture the complete investment. In certain larger organizations, facility personnel may be fully capitalized over a number of projects without their cost of salary and benefits striking the G & A expense line. Said one other way, if there have been no capital investments, the facility person may no longer be needed in the company.
Capital investing provides tremendous upside to the business and keep the business growing for many years. Prudent business people who have worked extremely difficult to generate revenues and profits must not provide away through shoddy capital management. Rather, continual growth may be attained by instilling discipline to their capital procedures.