When it comes to the long-term success of a business, one of the key drivers is prudent capital re-investment. Unlike operational expenses that are used to run the daily business or working capital to purchase inventory, money invested in the business that yields incremental income is known as capital investment.
Generally, these investments are made with a long-term expectation in mind and the return is achieved through added earnings.
In general, determining which projects to pursue should follow a process along these lines:
- What we want to do and why
- Cost and return on investment
- Competitor information
- Store management information
- Trade market information
- Punch line: Why should we make this investment?
With that in mind, here are some key items to include in your capital investment management program:
Form A Capital Review Committee: Even if it is with one other person, setting up a Capital Review Committee (CRC) creates discipline in determining the most prudent way to invest dollars back into your business. Bouncing ideas off one another and comparing potential investments make the process more scientific and less anecdotal.
Stay-In-Business Capital: Stay-in-Business Capital is exactly how it sounds — it is required capital to keep the business in operation. Known as maintenance capital, these investments keep your operation in shape by fixing broken equipment or renewing software licenses for example.
Discretionary Capital: Discretionary capital investments, on the other hand, are designed to generate incremental revenue to the operation over a period of years. Capital targets are in the three-to-five-year range to payback the investment.
Identify Compelling Projects: One of the most pertinent issues of which to be cognizant, is that a capital budget is not an allowance — returns are expected. As importantly, returns are expected above and beyond normal operating returns. In other words, if anticipated revenues are to increase 5% without capital investment, you must add the return from the capital investment to your already anticipated increase.
Team Role in Capital Management: Everyone on your team should have an active role in your capital management process. In many cases, the best ideas are those that bubble-up from the field. Lean on your team to identify and develop a business case for each investment. This will make your team engaged and as importantly, empowered to deliver results on the investment.
Capital management can be the lifeblood for your business and if properly executed, provide the means to long-term growth. The discipline surrounding the selection of where to invest your hard-earned dollars is critical to prudently pursue the best returning projects as opposed to the most popular ones.
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John Matthews, president and CEO of Gray Cat Enterprises Inc., is responsible for the management of all consulting activities for the firm, which include retail consulting for multiunit operations; interim executive management; and project management. Prior to founding his own company in 2004, Matthews held senior management positions as president of Jimmy John’s Gourmet Sandwiches and as VP of marketing, merchandising, facilities, corporate communications and real estate at Clark Retail Enterprises Inc. Additionally, Matthews worked for nine years in marketing management as the national marketing director of the Little Caesars Pizza Corp.