Hopefully your company is growing, cashflow is strong, and if that is the situation, what a fantastic scenario to be enjoying! Now, you must determine what are 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 an option. Lastly, reinvesting into the organization is a third substitute for improving the effectiveness of the organization.
The reinvestment of monies back into an organization as capital are among the most prudent approaches to improve your business. As 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 decision to reinvest should be a capital management procedure that directs the flow of capital not just in enhance returns, but minimizes budget mismanagement due to “capital creep”.
Developing a series of procedures not just makes sure that projects remain budget, but which they also get prioritized from the best returning investments. It is possible to fall victim to investing capital only inside the “sexy” projects – i.e., new store builds, etc., but a good capital management process should eliminate the bias of projects and solely invest in the most effective returning ones. By utilizing these guidelines, your capital management process may become more streamlined along with position the company for greater financial growth.
Capital Process: Clearly articulating the entire process of capital management for your team is the best way to inspire fantastic ideas from the field. The top-liners are interacting with your core customers on a daily basis and more often than not, probably have the best sensation of what investments could be created to improve that experience. Therefore, educating your field staff on not only the procedure but the advantages of identifying opportunities for investment engages your team while enhancing productivity. Bubbling up ideas is just one step along the way but an essential one. A field team that recognizes that the those who own the company welcome their ideas and are able to spend money on a number of them, sends a proactive message for the team.
Capital Request Form (CRF): It may seem mundane to have projects submitted having a Capital Request Form, but this is the first step to figure out whether or not the project is really a “have to have” or a “wish to have”. Identifying projects with business plans and expected financial targets inserts a layer of discipline into the process of capital investment. Very often, suggestions for investment fail to reach their targeted goals since the owner from the idea has not thought through the information on the request. This discipline of understanding both the soft and hard costs in the project combined with expected margin uplift from your investment is the only prudent method to ensure success.
One Store Investment Model: So that you can project the possible upside of the capital investment, an economic model needs to be designed to tracks an investment versus the return. Most financial models include areas such as existing financials for comparison; net present worth of money; payback periods of time; Internal Rates of Return (IRR); expense of capital; EBITDA projections, etc. Your CPA or business analyst must be able to develop a Proforma to your use that would enable you to add inside your specific metrics for every 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, creating a summary table for all the concurrent projects not only keeps these projects on task, but helps you to manage the overall cashflow 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 – the investment price of residing 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 – in order to carve out your discretionary expenditures for Return On Investments (ROI) purposes.
Cap Labor Worksheet: Lastly, capitalizing a few of the human labor involved with capital projects helps capture the “fully-loaded” cost of the project. Much like hiring a general contractor to build a house and including their cost to the overall budget, allocating a share of your facility personnel in the form of cap labor helps capture the complete investment. In a few larger organizations, facility personnel may be fully capitalized over numerous 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 not be needed at the company.
Capital investing provides tremendous upside for the business and keep the organization growing for years to come. Prudent company owners that have worked extremely hard to generate revenues and profits should not give it away through shoddy capital management. Rather, continual growth may be attained by instilling discipline within their capital procedures.