Hopefully your enterprise is growing, cash flow is strong, and if that is the case, what a fantastic scenario to be enjoying! Now, you have to determine do you know 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 alternative. Lastly, reinvesting into the company is a third alternative to improving the effectiveness of the company.
The reinvestment of monies directly into an organization by means of capital are the most prudent ways to increase your business. As I mentioned in an earlier blog called Making Prudent Capital Investments, I discussed the different forms of capital from maintenance to discretionary. Built into the decision to reinvest needs to be a capital management procedure that directs the flow of capital not only to enhance returns, but minimizes budget mismanagement caused by “capital creep”.
Developing a series of procedures not just helps to ensure that projects stay on budget, but which they will also get prioritized by 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 an excellent capital management process should remove the bias of projects and solely invest in the very best returning ones. By utilizing the subsequent guidelines, your capital management process can become more streamlined in addition to position the business for greater financial growth.
Capital Process: Clearly articulating the process of capital management to your team is the easiest method to inspire fantastic ideas from your field. The top-liners are getting together with your core customers on a daily basis and most of the time, probably hold the best feeling of what investments could be made to improve that experience. Therefore, educating your field staff on not merely this process but some great benefits of identifying opportunities for investment engages your team while enhancing productivity. Bubbling up ideas is just one step along the way but a crucial one. A field team that understands that the those who own the organization welcome their ideas and are prepared to spend money on many of them, sends a proactive message for the team.
Capital Request Form (CRF): It may look mundane to possess projects submitted with a Capital Request Form, but this is actually the initial step to find out if the project is a “have to have” or perhaps 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. Very often, tips for investment neglect to reach their targeted goals as the owner of the idea has not thought with the information on the request. This discipline of understanding both the soft and hard costs of 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 potential upside of the capital investment, a monetary 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 value of money; payback time periods; 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 would let you add within your specific metrics for each and every project. This discipline of benchmarking the project before a dollar is spent offers the necessary filter beforehand when estimating the return on the proposed project.
Capital Projections: For larger organizations, making a summary table for all the concurrent projects not only keeps these projects on task, but really 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 types of capital – maintenance and discretionary – to be able to carve out the discretionary expenditures for Return On Investments (ROI) purposes.
Cap Labor Worksheet: Lastly, capitalizing a number of the human labor involved in capital projects helps capture the “fully-loaded” cost of the project. Similar to employing a general contractor to develop a home and including their cost into the overall budget, allocating a percentage of your own facility personnel as cap labor helps capture the whole investment. In certain larger organizations, facility personnel might be fully capitalized over several projects without their cost of salary and benefits hitting the G & A expense line. Said yet another way, if there were 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 organization growing for a long time. Prudent company owners who have worked extremely tough 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.