Managing capital is different than managing cash

There are many tasks every small business owner must handle personally, but none is more CEO-specific than allocation of capital. Because the only thing more precious to a small business than capital is time.

Cash management is also a CEO-critical task, but operating cash is not capital. Cash is for expenses and is measured daily, weekly, and monthly. Capital is for investment and, as such, is measured in years; possibly even generations.

Below are three classic capital expenditure categories.

1. Replacement and upgrade
This is not repair (that’s an expense funded by operating cash flow), it’s a bigger commitment, most often caused when repair is no longer an option, or by obsolescence.

2. Innovation
Exciting innovations in digital devices and programs are at once creating opportunity and causing disruption. Small business CEOs have to mete out precious capital for innovation in a way that maximizes opportunity and minimizes disruption. This is a tough job because 21st century innovation weaves a fine seam between the leading edge and the bleeding edge.

3. Growth opportunity
Should your market footprint be expanded with an acquisition or new branch, or should an investment be made to build-out more online capability? Should investment be made in support of a new product direction, or in a digital inventory management system connected to the supply chain?

What to invest capital in – and when to do it – is different for every business. But what is not unique is making sure cash and capital are applied properly. Here are three classic best practices:

1. Don’t use operating cash to pay for something that has a life of more than a year.

2. Leaving profits in the business produces retained earnings as reserves to be used for capital investment.

3. A bank loan can augment retained earnings when the timeline of an opportunity or unfortunate capital-eating event doesn’t match your internal funding ability.

And remember, bankers love it when you have retained earnings skin in the game.

As we move from economic recovery to expansion, there will more and more decisions associated with growth opportunities. Having a capital plan that combines proper allocation of cash, retained earnings, and banking resources will go a long way toward helping you stay relevant to customers, maintain a competitive advantage, and be more profitable.

The only thing more precious to a small business CEO than time is capital. Use it wisely.

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