Hopefully your enterprise is growing, cashflow is strong, and if that is the case, what a fantastic scenario to be enjoying! Now, you have to determine what are the guidelines on how 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 alternative. Lastly, reinvesting back into the company is a third alternative to improving the effectiveness of the business.
The reinvestment of monies directly into a company in the form of capital are the most prudent approaches to increase your business. As I mentioned inside an earlier blog called Making Prudent Capital Investments, I discussed the different kinds of capital from maintenance to discretionary. Inherent in the choice to reinvest needs to be a capital management method that directs the flow of capital not just in enhance returns, but minimizes budget mismanagement due to “capital creep”.
Developing several procedures not just ensures that projects remain on budget, but they also 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 an excellent capital management process should remove the bias of projects and solely spend money on the best returning ones. By making use of these guidelines, your capital management process could become more streamlined in addition to position the business 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 getting together with your core customers every day and generally, probably possess the best feeling of what investments could be made to improve that experience. Therefore, educating your field staff on not only this process but the advantages of identifying opportunities for investment engages your team while enhancing productivity. Bubbling up ideas is simply one step in the process but an important one. An industry team that understands that the owners of the business welcome their ideas and are prepared to invest in a number of them, sends a proactive message for the team.
Capital Request Form (CRF): It might appear mundane to have projects submitted having a Capital Request Form, but this is the initial step to determine whether or not the project is a “must have” or perhaps a “want”. Identifying projects with business plans and expected financial targets inserts a layer of discipline into the entire process of capital investment. Much too often, ideas for investment forget to reach their targeted goals because the owner from the idea has not thought from the details of the request. This discipline of understanding both soft and hard costs in the project together with the expected margin uplift from your investment is definitely the only prudent approach to ensure success.
One Store Investment Model: In order to project the potential upside of a capital investment, an economic model needs to be created to tracks an investment versus the return. Most financial models include areas like existing financials for comparison; net present price of money; payback time periods; Internal Rates of Return (IRR); price of capital; EBITDA projections, etc. Your CPA or business analyst will be able to create a Proforma for your 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 provides the necessary filter ahead of time when estimating the return on the proposed project.
Capital Projections: For larger organizations, creating a summary table for all the concurrent projects not just keeps these projects on task, but really helps to manage the entire cash flow from the business. The capital projections summary should be an excel spreadsheet that tracks investments by month/quarter/period for many capital investments. Generally, maintenance capital – the investment cost of residing 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 – in order to carve 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” expense of the project. Similar to getting a general contractor to construct a home and including their cost into the overall budget, allocating a share of the facility personnel in the form of cap labor helps capture the whole investment. In certain 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 have been no capital investments, the facility person may no longer be needed in the company.
Capital investing provides tremendous upside towards the business and keep the company growing for many years. Prudent company owners who have worked extremely hard to generate revenues and profits should not give it away through shoddy capital management. Rather, continual growth can be attained by instilling discipline to their capital procedures.