Hopefully your company 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 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 down debt with the incremental cash may be a choice. Lastly, reinvesting into the organization is a third alternative to improving the effectiveness of the business.
The reinvestment of monies back to a company by means of capital are some of the most prudent approaches to improve your business. As I mentioned within an earlier blog called Making Prudent Capital Investments, I discussed the various types of capital from maintenance to discretionary. Built into the decision to reinvest should be a capital management procedure that directs the flow of capital not only to enhance returns, but minimizes budget mismanagement due to “capital creep”.
Developing several procedures not only ensures that projects remain budget, but they get prioritized from the best returning investments. It is easy to become a victim of 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 put money into the best returning ones. By making use of the following guidelines, your capital management process could become more streamlined along with position the business for greater financial growth.
Capital Process: Clearly articulating the entire process of capital management for your team is the simplest way to inspire fantastic ideas from the field. The top-liners are getting together with your core customers every day and most of the time, probably hold the best sense of what investments could be created to improve that experience. Therefore, educating your field staff on not only the procedure but the benefits 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 recognizes that the those who own the organization welcome their ideas and are willing to spend money on some of them, sends a proactive message to the team.
Capital Request Form (CRF): It may seem mundane to get projects submitted with a Capital Request Form, but this is the starting point to figure out if 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 whole process of capital investment. Very often, ideas for investment fail to reach their targeted goals as the owner in the idea has not thought through the information on the request. This discipline of understanding the soft and hard costs of the project together with the expected margin uplift from the investment is the only prudent approach to ensure success.
One Store Investment Model: So that you can project the potential upside of the capital investment, a financial model ought to be created to tracks an investment versus the return. Most financial models include areas including existing financials for comparison; net present value of money; payback time periods; Internal Rates of Return (IRR); price 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 each 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, developing a summary table for all the concurrent projects not only keeps these projects on task, but really helps to manage the overall cash flow of the business. The capital projections summary needs to be an excel spreadsheet that tracks investments by month/quarter/period for many capital investments. Generally, maintenance capital – an investment price of staying in business – doesn’t expect a return on the dollars spent. Therefore, the summary needs to be broken into cwwdvb types of capital – maintenance and discretionary – to be able to carve the discretionary expenditures for Return On Investments (ROI) purposes.
Cap Labor Worksheet: Lastly, capitalizing some of the human labor involved in capital projects helps capture the “fully-loaded” cost of the project. Much like employing a general contractor to develop a house and including their cost to the overall budget, allocating a percentage of your own facility personnel by means of cap labor helps capture the entire investment. In a few larger organizations, facility personnel may be fully capitalized over a number of projects without their expense of salary and benefits striking the G & A expense line. Said another way, if there was no capital investments, the facility person may not be needed in the company.
Capital investing provides tremendous upside towards the business while keeping the company growing for years to come. Prudent business owners that have worked extremely difficult to generate revenues and profits must not provide it with away through shoddy capital management. Rather, continual growth could be attained by instilling discipline to their capital procedures.