Hopefully your company is growing, cash flow is strong, and if that is the situation, what a fantastic scenario to be enjoying! Now, you must determine do you know the ideal way 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 a choice. Lastly, reinvesting into the organization is a third option to improving the strength of the business.
The reinvestment of monies directly into a business by means of capital are among the most prudent approaches to grow your business. When I mentioned in 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 ought to be a capital management process that directs the flow of capital not only to enhance returns, but minimizes budget mismanagement due to “capital creep”.
Developing a number of procedures not just makes sure that projects remain budget, but that they get prioritized through the best returning investments. It is possible to become a victim of investing capital only within 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 put money into the very best returning ones. By utilizing the following guidelines, your capital management process may become more streamlined in addition to position the organization 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 your field. The front-liners are getting together with your core customers on a regular basis and more often than not, probably possess the best feeling of what investments could be designed to improve that experience. Therefore, educating your field staff on not only this process but the benefits of identifying opportunities for investment engages your team while enhancing productivity. Bubbling up ideas is just one step in the process but a crucial one. An industry team that understands that the those who own the company welcome their ideas and are willing to invest in a number of them, sends a proactive message for the team.
Capital Request Form (CRF): It may seem mundane to possess projects submitted with a Capital Request Form, but here is the initial step to find out whether or not the project is actually a “need to have” or perhaps a “wish to have”. Identifying projects with business plans and expected financial targets inserts a layer of discipline into the entire process of capital investment. Very often, ideas for investment fail to reach their targeted goals as the owner in the idea has not thought from the information on the request. This discipline of understanding both the soft and hard costs in the project together with the expected margin uplift through the investment will be the only prudent method to ensure success.
One Store Investment Model: So that you can project the possible upside of the capital investment, an economic model ought to be created to tracks the investment versus the return. Most financial models include areas including 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 enable you to add in your specific metrics for each 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 really helps to manage the general income 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 – an investment expense of remaining in business – doesn’t expect a return on the dollars spent. Therefore, the summary should be broken into cwwdvb kinds 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 with capital projects helps capture the “fully-loaded” expense of the project. Similar to hiring a general contractor to build a property and including their cost in to the overall budget, allocating a share of your facility personnel by means of cap labor helps capture the complete investment. In certain larger organizations, facility personnel could be fully capitalized over a number of projects without their price of salary and benefits hitting the G & A expense line. Said one other way, if there were no capital investments, the facility person may not be needed in the company.
Capital investing provides tremendous upside to the business while keeping the company growing for years to come. Prudent business people which have worked extremely difficult to generate revenues and profits must not provide it with away through shoddy capital management. Rather, continual growth may be attained by instilling discipline to their capital procedures.