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 exactly what are the best ways 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 an alternative. Lastly, reinvesting into the organization is a third alternative to improving the effectiveness of the company.
The reinvestment of monies directly into a company in the form of capital are among the most prudent approaches to improve your business. As I mentioned inside an earlier blog called Making Prudent Capital Investments, I discussed the different forms of capital from maintenance to discretionary. Inherent in the decision to reinvest ought to be a capital management method that directs the flow of capital not just to enhance returns, but minimizes budget mismanagement due to “capital creep”.
Developing a series of procedures not only ensures that projects remain on budget, but which they will also 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 very best returning ones. Through the use of the following guidelines, your capital management process could become more streamlined along with position the organization for greater financial growth.
Capital Process: Clearly articulating the entire process of capital management to your team is the best way to inspire fantastic ideas from your field. The front side-liners are interacting with your core customers on a regular basis 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 just the procedure but some great benefits of identifying opportunities for investment engages your team while enhancing productivity. Bubbling up ideas is just one step in the process but an essential one. An industry team that recognizes that the people who own the organization welcome their ideas and are willing to invest in some of them, sends a proactive message towards the team.
Capital Request Form (CRF): It may look mundane to get projects submitted having a Capital Request Form, but this is actually the initial step to determine if the project is really a “must have” or perhaps a “want”. Identifying projects with business plans and expected financial targets inserts a layer of discipline into the whole process of capital investment. All too often, tips for investment fail to reach their targeted goals since the owner from the idea has not yet thought from the specifics of the request. This discipline of understanding the soft and hard costs in the project together with the expected margin uplift from the investment is definitely the only prudent way to ensure success.
One Store Investment Model: In order to project the possibility upside of a capital investment, an economic model should be built to tracks your time and money 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 will be able to develop a Proforma for your use that could let you 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 ahead of time when estimating the return on the proposed project.
Capital Projections: For larger organizations, making a summary table for all of the concurrent projects not only keeps these projects on task, but helps to manage the entire cash flow of the business. The capital projections summary ought to be an excel spreadsheet that tracks investments by month/quarter/period for many capital investments. Generally, maintenance capital – your time and money price of remaining 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 – so that you can 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” expense of the project. Just like hiring a general contractor to develop a property and including their cost into the overall budget, allocating a share of the facility personnel in the form of cap labor helps capture the entire investment. In certain larger organizations, facility personnel might be fully capitalized over several projects without their cost of salary and benefits showing up in the G & A expense line. Said one other way, if there have been no capital investments, the facility person may no longer be needed on the company.
Capital investing can offer tremendous upside towards the business and keep the company growing for years to come. Prudent company owners which have worked extremely tough to generate revenues and profits should never provide away through shoddy capital management. Rather, continual growth may be attained by instilling discipline within their capital procedures.