Hopefully your business is growing, cashflow is strong, and if that is the case, what a fantastic scenario to be enjoying! Now, you must determine exactly what are 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 off debt with the incremental cash may be an option. Lastly, reinvesting into the company is a third option to improving the effectiveness of the business.
The reinvestment of monies directly into a business in the form of capital are the most prudent methods to improve your business. Because I mentioned within an earlier blog called Making Prudent Capital Investments, I discussed the different forms of capital from maintenance to discretionary. Inherent in the choice to reinvest ought to be a capital management procedure that directs the flow of capital not just to enhance returns, but minimizes budget mismanagement caused by “capital creep”.
Developing several procedures not only makes sure that projects stay on budget, but that they will also get prioritized by the best returning investments. You can easily fall victim to investing capital only in the “sexy” projects – i.e., new store builds, etc., but a good capital management process should get rid of the bias of projects and solely invest in the most effective returning ones. Through the use of the subsequent guidelines, your capital management process can become more streamlined as well as position the business for greater financial growth.
Capital Process: Clearly articulating the entire process of capital management in your team is the best way to inspire fantastic ideas from the field. The front-liners are interacting with your core customers on a regular basis and more often than not, probably have the best sense of what investments might be made to improve that experience. Therefore, educating your field staff on not merely the procedure but the advantages of identifying opportunities for investment engages your team while enhancing productivity. Bubbling up ideas is just one step during this process but an important one. A field team that recognizes that the those who own the company welcome their ideas and are able to invest in some of them, sends a proactive message for the team.
Capital Request Form (CRF): It may seem mundane to have projects submitted using a Capital Request Form, but this is the starting point to find out whether the project is a “must 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. All too often, suggestions for investment fail to reach their targeted goals since the owner in the idea has not thought through the details of the request. This discipline of understanding both the soft and hard costs of the project combined with the expected margin uplift from the investment is definitely the only prudent approach to ensure success.
One Store Investment Model: To be able to project the possibility upside of a capital investment, an economic model should be designed to tracks your time and money 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); price of capital; EBITDA projections, etc. Your CPA or business analyst will be able to develop a Proforma for your use that could allow you to add within your specific metrics for each project. This discipline of benchmarking the project before a dollar is spent provides the necessary filter beforehand when estimating the return on the proposed project.
Capital Projections: For larger organizations, making a summary table for each of the concurrent projects not merely keeps these projects on task, but really helps to manage the general income in the business. The capital projections summary should be an excel spreadsheet that tracks investments by month/quarter/period for all capital investments. Generally, maintenance capital – an investment expense of remaining 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 – in order to carve out the discretionary expenditures for Return On Investments (ROI) purposes.
Cap Labor Worksheet: Lastly, capitalizing a few of the human labor associated with capital projects helps capture the “fully-loaded” price of the project. Much like employing a general contractor to build a property and including their cost in to the overall budget, allocating a portion of the facility personnel as cap labor helps capture the complete investment. In certain larger organizations, facility personnel could be fully capitalized over several projects without their cost of salary and benefits striking the G & A expense line. Said yet another way, if there was no capital investments, the facility person may not be needed at the company.
Capital investing provides tremendous upside towards the business and keep the company growing for many years. Prudent company owners that have worked extremely tough to generate revenues and profits should never give it away through shoddy capital management. Rather, continual growth can be attained by instilling discipline within their capital procedures.