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Capital Requests Hinge on Just Three Letters: ROI (Part 1 of 3)

“How can an on-premise laundry manager most effectively demonstrate to administration (or a for-profit textile rental operator demonstrate to financiers) the need for capital improvements and renovation in his or her plant?”Hotel/Motel/Resort Laundry — Charles Loelius, The Pierre New York, New York, N.Y.
The squeaky wheel doesn’t always get the grease. When trying to make the case for capital investment in any laundry facility, administrators and investors alike want to see cold, hard facts.
Laundry managers and operators will need to show data demonstrating the return on investment (ROI) and internal rate of return (IRR) that the capital asset will generate.
Whether a laundry is operated as a for-profit entity, or as a cost center such as a co-op or OPL, senior management is charged with employing a specific level of assets that will deliver an expected financial result in a competitive market.
In other words, each organization has a finite amount of capital to allocate. The successful laundry manager needs to become familiar with financial calculations such as ROI and IRR in order to effectively communicate with upper management and obtain necessary capital.
The ability to acquire capital to upgrade, renovate or expand is a key component in operating an efficient, sustainable laundry.
[NP][/NP]ROI is the number of years, or fraction thereof, that an investment of capital would be recovered as a result of operational cost savings.
It is calculated by dividing the cost of the investment by its annual resultant savings. ROI, therefore, is a simple payback analysis.
For example, the $225,000 purchase of three flatwork feeders results in labor-and-benefit savings of $75,000 annually. In this scenario, the equipment cost is recovered in three years. Generally speaking, an ROI of three years or less represents a sound capital investment.
In another example, adding a $125,000 blanket-folding system results in annual labor-and-benefit savings of $55,000. The ROI in this case is two years, three months. This makes the blanket folder, in the mind of an investor, a sounder investment.
As a rule, the higher the labor cost, the quicker the payback on automated equipment. Operations with low labor costs will find it more difficult to justify capital expense for equipment acquisition, as payback will usually exceed three years.
The IRR takes into account the time value of money. It examines the net present value of all cash flow required for the initial asset purchase, and the prospective cash-flow increase as the result of reducing operating costs. Most financial managers will use a five-year IRR as the chief criterion when allocating capital.
The rule of thumb is simply this: the higher the IRR, the more viable the investment of capital. Typically, the minimum acceptable IRR is 12%. An ironing system with an IRR of 10% is a far less attractive capital investment to an investor than a small-piece folder with a 50% IRR.
Do not use the IRR to rate mutually exclusive projects, such as an ironing system vs. a small-piece folder, but rather to decide if the equipment is worth the capital investment in the first place.
Being an effective and persuasive communicator, both to upper management as well as to employees, is the hallmark of a successful operator.Healthcare Laundry — Dianna Aracich, Wheeling (W.Va.) Hospital
The most effective way to demonstrate to administration the need for capital improvements or plant renovation is to have the documentation to back it up.
[NP][/NP]Here is where the documentation we discussed earlier this year (What Gets Measured Is What Gets Done) comes into play, including the information you tracked for your own use that seemed to be of no value to anyone but you.
Cost savings, customer satisfaction and increased revenue are going to be the driving forces behind any decision for capital expenses in this economy, so do your homework.
You’ll need to be able to demonstrate how the proposed endeavor would reduce costs by lowering energy or labor needs, increasing inventory on shelves, providing a better-quality product that will reduce linen replacement due to rag-outs and, ultimately, increasing customer satisfaction (which can increase revenue).
There is a basic, five-step procedure that may help. The simpler the explanation the better, as long as you pack as much pertinent information in it as possible. Capital budget committees, for the most part, want “the facts and only the facts, please.”

  1. Present Capabilities — Explain how the task is being done currently.
  2. Present Difficulties — Explain the problems you’re having with the current system and how it’s affecting production, energy and labor costs. State the age of the equipment you want to replace or add onto.
  3. Present Alternatives — Explain what will need to be done, adjusted or added onto if no action is taken. Will you need to add another shift, increase overtime, buy more linen or pay more in energy costs?
  4. Present Recommendation — Explain in detail what it is you want to purchase or change and the effect it will have on your operation, i.e. cost savings in labor, utilities, so on.
  5. Present Cost Estimate — Include the purchase price, installation cost, freight, taxes, any options you wish to have or could live without, and any downtime or in-house labor cost.

Present two or three estimates, including what you know about each company and any special features or services they may provide. Do they do their own installation or outsource it? If they outsource it, what do you know about that company?
Make sure you are on the same page with bidders regarding installation. Do they deliver and set in place, or do they provide turn-key installation, including delivery and installation to start-up (which includes all needed utility modifications and hookups)?
In your final recommendations, include what, where and when you would like or need to make the purchase or renovation.
Explain which company you would like to use and why. Do you have a history with them? Have you seen their work? Are they reliable before and after the sale? This kind of information is especially important if the company you prefer has submitted a slightly higher bid.
Remember, you are the expert in your field, and you have to live with the outcome. Make sure the committee understands the logic behind your reasoning, and be prepared to answer any questions the members may have.ATTENTION: American Laundry News Seeks Applicants for 2011 Panel of Experts; Nov. 17 Deadline to ApplyAmerican Laundry News seeks the contributions of today’s leading laundry and linen services professionals as it prepares to select its Panel of Experts for 2011. The magazine is seeking panelists who are actively involved in promoting the best interests of institutional or on-premise laundering and/or textile rental services.
The magazine will choose representatives from several industry segments, including hotel/motel laundry, healthcare laundry, linen supply/commercial laundry, textile/uniform rental and others, to contribute to monthly articles that will appear in American Laundry News and on www.americanlaundrynews.com throughout 2011.
Those interested in applying are asked to e-mail Editor Bruce Beggs (bbeggs@crain.com). He’ll supply a link to an online application that must be submitted by Wednesday, Nov. 17, for parties to be eligible for selection.Please check back on Friday, Oct. 29 for Part 2 of this story.
 

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