Strategic Finance and Capital Management
written by : William F Bryant Capital Management involves any usage of capital within a business environment. This seems pretty straight forward, but is it?
Capital can be considered to be any resource that can be used to produce your product or service. This can be cash, which could be debt, equity, or securities your firm holds in other investments, accounts receivable, inventories, facilities and equipment, and even accounts payable since it acts as a method of financing. If there is a dollar tag in the accounting books, there is a good chance you are looking at capital and its usage, current or over time. Every one of these accounts require management decisions such as, how much to hold, when to pay for invoices, when do we receive our invoice payments, do we buy or lease and so on. These are operational budget considerations to keep your product flowing and growing. Revenues, of course, are the source to pay for operations but, can your revenues be more effectively used and what do you do with leftover cash that you aren't using for operations? The answer to this question is found in strategic financing considerations. Let's think about funding operations. First, you need funding to maintain your operations, which will include expenditures for maintenance and, second, funding to expand operations, which included expansion to all areas necessary for current operations. All of this will be your capital budgetary requirements, to include, cash on-hand, additional inventories and equipment, increasing accounts receivables and increasing accounts payable, in addition to any accruals. You may anticipate that since you have optimized operations and are getting the most out of your margins that you can pay for it with earnings, but have you considered changes to your Cash Conversion Cycle or the most efficient use of your earnings? Your Cash Conversion Cycle is how quickly you receive cash from the conversion of inventories to sales. What risks are inherent in expanded accounts receivables? Do you truly get the most return on equity from the usage of your own earnings? What about making use of tax shields? Let's think about the income statement, although we will be more concerned with free cash flows in an actual assessment this increases both. If you have optimized your operations and are getting the most out of your revenues, by the time you get to your EBIT you will notice two expenses, interest expense and tax expense. Used effectively, strategic debt financing can create a tax shield in addition to offering additional funding for expansion and alleviating some of the pressures of the timing of repayment risk. Strategic finance decisions and capital management are closely related. In fact, one could consider strategic finance decisions as a subset of a company’s overall capital management since it involves usage of cash outside of operational needs for distributions to equity holders or repurchasing, paying down debt or interest and investment decisions. Strategic financing decisions can optimize your company’s profitability and return metrics. In short, most everything in a business can be optimized, capital included. Understanding your capital structure, sources and obligations will enable your company to develop strategies to achieve maximum firm value. |
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