Repayment of Capital Investments

Knowing and understanding our Financial Statements is vital to developing an appreciation of where your business value is currently and where it is headed.
When we look to start a business there is typically an investment made either using personal wealth, or more often borrowed money with the expectation of future profits. Sometimes this equals a substantial amount of money, mostly applied to equipment or leasehold improvements, and sometimes the purchase of another business. These assets are organized in the balance sheet under the heading Long Term or Capital Assets, and conversely, Long Term Liabilities for the outstanding loan amount. (Don't forget that the Long Term Assets value are depreciated by about 20% per year as their usefulness is consumed.)

Any coffee shop owner would hopefully understand that this capital investment needs to be repaid, and therefore any net profit is not in truth profit, but a repayment of capital until the debt is settled. In most cases this period of repayment equals 4-5 years which coincidentally is the same period of time over which the value of the investment nets to zero through depreciation. Usually we have paid monthly for 4-5 years and in the end we have zero value on the balance sheet to show for our investment except a great deal of depreciation. But all is not lost as this is the time where the assets fully return all of the profit to the company rather than servicing a loan and is the most important time in a business cycle. Given careful and attentive servicing, most well purchased equipment and leaseholds can continue to deliver utility beyond their cycle of depreciation.

Do not fall into the trap of replacing perfectly functional equipment and putting yourself back on the repayment treadmill. If your competitive advantage is tied to exhibiting the latest equipment, you have put your coffee shop in a similar situation as a pharmaceutical company that needs to spend constantly on research or risk precipitous drops in revenue. By necessity these business models require constant investments of capital that either carry interest payments, or rob owners of personal net profit.

If we fully comprehend the literal meaning of Repayment of Capital Investments, it is clear that the money spent initially was an investment and not a cost of doing business. We all know that an investment is a wise one if and only if it makes us more money than we spent. Those of us with investment accounts vested in various Stocks can quickly glance at our monthly statements and determine the present value of money invested and make a determination of whether our advisor knows what he/she is doing. As a coffee shop owner, apply the same critical values to your investment in capital expenses. If you are as rigorous with business investments as you are with personal, you will come to the conclusion that the investment only returns value once it has been paid for and that the most prudent path for future capital investments is to pay for them with past savings rather than future profits. Remember: Keep Capital Investments employed beyond the repayment period!