Increasing capital returns is largely dependent on what form you want those increases to take. On one hand, there are standard capital returns, which can take any form as long as they are profitable. This could mean a PC upgrade or a new company vehicle. Cash capital returns, however, are straight profit and represent real dollars in your bank account. The latter, therefore, is more difficult to increase, as the former can take many forms and the latter can only take one.
Standard Capital Return
Increase your income. This varies depending on what business you are in. You could sign on new clients or raise your prices, but these are definitely not the only ways to increase your income.
Increase the value of your assets. This can happen incidentally sometimes, especially with land values.
Decrease your expenses. This can be done by streamlining your processes or changing to less expensive, non-asset equipment (like switching from premium fuel to regular fuel).
Re-invest the money you saved back into your business to buy more assets or increase the value of the ones you have. For example, you could add something to your business's property to increase its value or change the vehicles you use.
Reduce your cash capital by reducing the amount of profit you take. So, if you usually take a $50,000 salary, reduce it to $30,000 and put the $20,000 difference back into the business.
Put your new values into this formula (Net income-profit/total capital) to calculate your new capital return, which should be a higher percentage than it was previous to carrying out one or all of the previous steps.
Calculate your earnings before interest, taxes, depreciation and amortization (EBITDA). Divide this by the total value of your equity to determine your cash capital returns.
Increase your earnings by following the previous steps outlined.
Decrease your equity by converting some of it into cash. So, if you have a $60,000 truck as part of your business but can produce the same income with a $40,000 truck, then downgrade and put the $20,000 into your earnings.
Be careful not to assume that cash return is better than standard return. It is possible to have a very profitable business that does not generate a lot of cash.
On the flip side, make sure cash flow exists. Since you cannot spend equity, you need at least some cash.
- Be careful not to assume that cash return is better than standard return. It is possible to have a very profitable business that does not generate a lot of cash.
- On the flip side, make sure cash flow exists. Since you cannot spend equity, you need at least some cash.
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