Hopefully your business is growing, cash flow is strong, and if that is the case, what a fantastic scenario to be enjoying! Now, one must determine what are the best ways 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 down debt with the incremental cash may be an option. Lastly, reinvesting back into the business is a third alternative to improving the strength of the company.
The reinvestment of monies back into a business in the form of capital are some of the most prudent ways to grow your business. As 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 decision to reinvest should be a capital management process 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 only ensures that projects stay on budget, but that they also get prioritized by the best returning investments. It is easy to fall victim to investing capital only in the “sexy” projects – i.e., new store builds, etc., but a solid capital management process should eliminate the bias of projects and solely invest in the best returning ones. By utilizing the following guidelines, your capital management process can become more streamlined as well as position the company for greater financial growth.
Capital Process: Clearly articulating the process of capital management to your team is the best way to inspire fantastic ideas from the field. The front-liners are interacting with your core customers on a daily basis and more often than not, probably have the best sense of what investments could be made to improve that experience. Therefore, educating your field staff on not only the process but the benefits of identifying opportunities for investment engages your team while enhancing productivity. Bubbling up ideas is only one step in the process but a crucial one. A field team that recognizes that the owners of the company welcome their ideas and are willing to invest in some of them, sends a proactive message to the team.
Capital Request Form (CRF): It may seem mundane to have projects submitted with a Capital Request Form, but this is the first step to determine whether the project is a “need to have” or a “want to have”. Identifying projects with business plans and expected financial targets inserts a layer of discipline into the process of capital investment. All too often, ideas for investment fail to reach their targeted goals because the owner of the idea has not thought through the details of the request. This discipline of understanding both the soft and hard costs of the project combined with the expected margin uplift from the investment is the only prudent way to ensure success.
One Store Investment Model: In order to project the potential upside of a capital investment, a financial model should be built to tracks the investment 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); cost of capital; EBITDA projections, etc. Your CPA or business analyst should be able to create a Proforma for your use that would enable 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, creating a summary table for all of the concurrent projects not only keeps these projects on task, but helps to manage the overall cash flow of the business. The capital projections summary should be an excel spreadsheet that tracks investments by month/quarter/period for all capital investments. Generally, maintenance capital – the investment cost of staying in business – doesn’t expect a return on the dollars spent. Therefore, the summary should be broken into two types of capital – maintenance and discretionary – in order to carve out the 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. Much like hiring a general contractor to build a house and including their cost into the overall budget, allocating a percentage of your facility personnel in the form of cap labor helps capture the entire investment. In some larger organizations, facility personnel may be fully capitalized over a number of projects without their cost of salary and benefits hitting the G & A expense line. Said another way, if there were no capital investments, the facility person may no longer be needed at the company.
Capital investing can provide tremendous upside to the business and keep the company growing for years to come. Prudent business owners that 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 into their capital procedures.