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 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 their businesses, paying down debt with the incremental cash may be a choice. Lastly, reinvesting into the organization is a third option to improving the effectiveness of the company.
The reinvestment of monies back to a business by means of capital are among the most prudent approaches to increase your business. When I mentioned within an earlier blog called Making Prudent Capital Investments, I discussed the many types of capital from maintenance to discretionary. Inherent in the decision to reinvest ought to be a capital management process that directs the flow of capital not only to enhance returns, but minimizes budget mismanagement caused by “capital creep”.
Developing a series of procedures not just ensures that projects stay on budget, but that they get prioritized by the best returning investments. It is easy to fall victim to investing capital only in the “sexy” projects – i.e., new store builds, etc., but an excellent capital management process should get rid of the bias of projects and solely spend money on the very best returning ones. By making use of the following guidelines, your capital management process could become more streamlined as well as position the organization for greater financial growth.
Capital Process: Clearly articulating the entire process of capital management in your team is the simplest way to inspire fantastic ideas from the field. The top-liners are getting together with your core customers on a daily basis and more often than not, probably have the best sense of what investments could be designed 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 simply one step in the process but an important one. An industry team that recognizes that the owners of the business welcome their ideas and are willing to spend money on some of them, sends a proactive message for the team.
Capital Request Form (CRF): It may seem mundane to get projects submitted having a Capital Request Form, but this is actually the initial step to determine whether or not the project is actually a “need to 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. Very often, ideas for investment forget to reach their targeted goals as the owner from the idea has not thought from the specifics of the request. This discipline of understanding the soft and hard costs in the project combined with expected margin uplift from the investment will be the only prudent method to ensure success.
One Store Investment Model: So that you can project the potential upside of a capital investment, a financial model should be designed to tracks your time and money versus the return. Most financial models include areas including existing financials for comparison; net present price 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 develop a Proforma for your use that will let you add inside your specific metrics for each 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 all the concurrent projects not only keeps these projects on task, but helps you to manage the overall income of 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 residing in business – doesn’t expect a return on the dollars spent. Therefore, the summary ought to be broken into cwwdvb kinds of capital – maintenance and discretionary – in order to carve the discretionary expenditures for Return On Investments (ROI) purposes.
Cap Labor Worksheet: Lastly, capitalizing a number of the human labor associated with capital projects helps capture the “fully-loaded” cost of the project. Similar to hiring a general contractor to build a house and including their cost into the overall budget, allocating a percentage of your own facility personnel as cap labor helps capture the entire investment. In a few larger organizations, facility personnel might be fully capitalized over numerous projects without their expense of salary and benefits hitting the G & A expense line. Said one other way, if there were no capital investments, the facility person may no longer be needed in the company.
Capital investing can offer tremendous upside towards the business whilst keeping the organization growing for many years. Prudent business people that have worked extremely tough to generate revenues and profits must not provide it with away through shoddy capital management. Rather, continual growth may be attained by instilling discipline within their capital procedures.