Hopefully your business is growing, cash flow is strong, and if that is the situation, what a fantastic scenario to be enjoying! Now, one must determine exactly what are the guidelines on how to put those earnings to make use of. 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 potency of the company.
The reinvestment of monies back into a business as capital are the most prudent methods to grow your business. When I mentioned inside an earlier blog called Making Prudent Capital Investments, I discussed the different types of capital from maintenance to discretionary. Built into the decision to reinvest ought to be a capital management procedure that directs the flow of capital not only to enhance returns, but minimizes budget mismanagement brought on by “capital creep”.
Developing several procedures not only ensures that projects stay on budget, but that they get prioritized from the best returning investments. You can easily become a victim of investing capital only inside the “sexy” projects – i.e., new store builds, etc., but a solid capital management process should eliminate the bias of projects and solely spend money on the most effective returning ones. By making use of the following guidelines, your capital management process can become more streamlined as well as position the organization 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 your field. The top-liners are interacting with your core customers on a daily basis and more often than not, probably hold the best sensation of what investments could be made to improve that experience. Therefore, educating your field staff on not just the procedure but the benefits of identifying opportunities for investment engages your team while enhancing productivity. Bubbling up ideas is simply one step along the way but a crucial one. A field team that understands 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 might appear mundane to have projects submitted using a Capital Request Form, but here is the first step to find out whether or not the project is actually a “have to have” or a “want”. 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 forget to reach their targeted goals since the owner in the idea has not thought through the information on the request. This discipline of understanding the soft and hard costs in the project combined with the expected margin uplift from the investment will be the only prudent approach to ensure success.
One Store Investment Model: In order to project the possible upside of a capital investment, a financial model ought to be created to tracks the investment 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); cost of capital; EBITDA projections, etc. Your CPA or business analyst must be able to develop a Proforma to your use that would let you add in your specific metrics for every 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, creating a summary table for all of the concurrent projects not just keeps these projects on task, but helps you to manage the overall cashflow 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 ought to be broken into cwwdvb kinds of capital – maintenance and discretionary – so that you can carve out the discretionary expenditures for Return On Investments (ROI) purposes.
Cap Labor Worksheet: Lastly, capitalizing some of the human labor associated with capital projects helps capture the “fully-loaded” price of the project. Similar to hiring a general contractor to develop a home and including their cost into the overall budget, allocating a share of your own facility personnel as cap labor helps capture the complete investment. In some larger organizations, facility personnel may be fully capitalized over numerous projects without their price 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 on the company.
Capital investing can provide tremendous upside to the business and keep the company growing for many years. Prudent company owners which have worked extremely tough to generate revenues and profits must not provide away through shoddy capital management. Rather, continual growth can be attained by instilling discipline within their capital procedures.