Hopefully your enterprise is growing, cash flow is strong, and if that is the case, what a fantastic scenario to be enjoying! Now, you must determine do you know the best ways 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 off debt with the incremental cash may be an alternative. Lastly, reinvesting into the organization is a third option to improving the potency of the business.
The reinvestment of monies back to a business by means of capital are among the most prudent approaches to increase your business. When I mentioned in an earlier blog called Making Prudent Capital Investments, I discussed the various forms of capital from maintenance to discretionary. Inherent in the choice to reinvest ought to be a capital management method that directs the flow of capital not just in enhance returns, but minimizes budget mismanagement brought on by “capital creep”.
Developing a number of procedures not merely makes sure that projects stay on budget, but they get prioritized by the best returning investments. You can easily 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 put money into the best returning ones. Through the use of the following guidelines, your capital management process may become more streamlined as well as position the business 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-liners are interacting with your core customers on a daily basis and more often than not, probably hold the best sensation of what investments may be made to improve that experience. Therefore, educating your field staff on not just this process 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 understands that the those who own the organization welcome their ideas and are able to invest in a number of them, sends a proactive message to the team.
Capital Request Form (CRF): It may look mundane to get projects submitted using a Capital Request Form, but this is the starting point to determine whether or not the project is actually a “have to have” or even 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. Much too often, tips for investment forget to reach their targeted goals since the owner of the idea has not yet thought with the information on the request. This discipline of understanding both soft and hard costs from the project combined with the expected margin uplift from your investment is the only prudent way to ensure success.
One Store Investment Model: In order to project the potential upside of a capital investment, an economic model ought to be built 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 must be able to produce a Proforma for the 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 provides 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 merely keeps these projects on task, but helps to manage the overall cash flow in 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 – the investment expense 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 some of the human labor involved in capital projects helps capture the “fully-loaded” cost of the project. Just like employing a general contractor to construct a house and including their cost into the overall budget, allocating a share of your own facility personnel by means of cap labor helps capture the entire investment. In some larger organizations, facility personnel could be fully capitalized over several projects without their expense of salary and benefits hitting the G & A expense line. Said another way, if there was no capital investments, the facility person may no longer be needed in the company.
Capital investing provides tremendous upside to the business while keeping the organization growing for a long time. Prudent business people who have worked extremely difficult to generate revenues and profits should never provide away through shoddy capital management. Rather, continual growth may be attained by instilling discipline to their capital procedures.