Hopefully your enterprise is growing, cash flow is strong, and if that is the situation, what a fantastic scenario to be enjoying! Now, one must determine what are the guidelines on how 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 the businesses, paying down debt with the incremental cash may be an alternative. Lastly, reinvesting into the organization is a third alternative to improving the potency of the business.
The reinvestment of monies back to a business as capital are the most prudent ways to improve your business. When I mentioned in an earlier blog called Making Prudent Capital Investments, I discussed the many types of capital from maintenance to discretionary. Built into 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 brought on by “capital creep”.
Developing several procedures not just ensures that projects stay on budget, but they get prioritized by the best returning investments. You can easily fall victim to investing capital only within the “sexy” projects – i.e., new store builds, etc., but an excellent capital management process should remove the bias of projects and solely put money into the most effective returning ones. By making use of the subsequent guidelines, your capital management process can become more streamlined in addition to position the organization for greater financial growth.
Capital Process: Clearly articulating the process of capital management in your team is the best way to inspire fantastic ideas from your field. The front side-liners are getting together with your core customers on a daily basis and most of the time, probably possess the best feeling of what investments may be created to improve that experience. Therefore, educating your field staff on not just 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 essential one. An industry team that recognizes that the people who own the organization 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 look mundane to have projects submitted with a Capital Request Form, but this is the first step to find out whether the project is 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 process of capital investment. All too often, suggestions for investment forget to reach their targeted goals because the owner of the idea has not thought with the information on the request. This discipline of understanding the soft and hard costs from the project combined with expected margin uplift from your investment will be the only prudent way to ensure success.
One Store Investment Model: To be able to project the potential upside of the capital investment, a monetary model should be designed to tracks the investment versus the return. Most financial models include areas like 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 produce a Proforma for your use that will allow you to add in your specific metrics for every project. This discipline of benchmarking the project before a dollar is spent supplies the necessary filter in advance when estimating the return on the proposed project.
Capital Projections: For larger organizations, developing a summary table for each of the concurrent projects not just keeps these projects on task, but helps to manage the general cashflow from the business. The capital projections summary ought 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 a few of the human labor involved in capital projects helps capture the “fully-loaded” price of the project. Just like hiring a general contractor to construct a house and including their cost in to the overall budget, allocating a portion of the facility personnel in the form of cap labor helps capture the complete investment. In some larger organizations, facility personnel could be fully capitalized over numerous projects without their cost of salary and benefits showing up in the G & A expense line. Said yet another way, if there were no capital investments, the facility person may not be needed on the company.
Capital investing provides tremendous upside to the business whilst keeping the company growing for many years. Prudent business people who have worked extremely tough 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.