Capital management in Belgium is essential, especially in the current economic climate where companies are striving to maintain profitability.
Capital management is an essential part of taking control of your company’s financials and focusing on growth, profits, financial security and independence.
Why does capital management matter?
Capital management sets out a business’ policy for investing available funds into assets that generate profit. It also determines which sources of finance are used to invest in assets (shareholders or debt) plus setting objectives for return on investment or another suitable benchmark.
Strategies can include targeting high-growth sectors, investing in high-growth markets or developing new products/services.
The finance department (or another department depending on the company’s size) is responsible for setting up policies and procedures to ensure capital management deals with issues like risk, liquidity and cost control.
Capital management is vital because it determines where money is spent within a business. Poorly executed capital management can result in lower than expected returns, decreased financial security and increased debt.
However, well put together capital management will increase shareholder value, improve cash flow, and reduce debt levels.
What are some capital management goals?
Capital management goals can vary from one company to the next, but they typically include:
- High growth sector investments
- Investment in high-growth markets
- Development of new products or services
- Enhanced cost control (cost-minimizing)
- Improved financial security (reducing debt levels through increased cash flow)
How is capital allocated within a company?
The capital allocation includes how funds are raised, invested and distributed.
For example, if the business has $100 in capital to invest, it can either allocate that money to investment projects or use it for other purposes like paying down debt.
Scenario 1:
$50 is allocated to an investment project with an expected $80 after two years. The remaining $50 is held as cash. The funds are returned at the end of the two years, $80 is made in profits, and the money saved is $50.
Scenario 2:
$50 is allocated to an investment project with an expected $80 after two years. The remaining $25 is set aside for emergencies, while the remaining balance ($25) will be earmarked for future capital allocations (i.e. another investment project). At the end of the two years, funds are returned, debts are paid down, and the remaining profit ($30) is used for future investments.
Why should managers take time to understand capital management?
With increased business competition comes increased pressure to run a leaner company that can still perform at higher levels. This means taking more control over how your money is spent within your company.
Implementing capital management will allow you to accomplish this while freeing up more time for other vital tasks like strategy development, staff management and customer retention.
Capital management is essential because it’s impossible to prioritize where funds are invested – resulting in poor strategic decision making that could have negative consequences for shareholders.
It’s also worth noting that not having a plan for capital allocation can lead to cash flow problems or even bankruptcy if the company cannot pay its debts. It reduces the likelihood of both of these things through increased financial security.
How should managers execute strong capital management?
Managers need to be aware of their available capital and sources of finance within their business to ensure enough money is being appropriately allocated.
For example, if the company has $100 in capital to invest, it can either give that money to investment projects or use it for other purposes like paying down debt.
Scenario 1:
$50 is allocated to an investment project with an expected $80 after two years. The remaining $50 is held as cash. The funds are returned at the end of the two years, $80 is made in profits, and the money saved is $50.
In Conclusion
Capital management is essential because it’s impossible to prioritize where funds are invested – resulting in poor strategic decision making that could have negative consequences for shareholders.
It also reduces the likelihood of cash flow problems and bankruptcy by increasing financial security.
Managers need to be aware of their available capital and sources of finance within their business to ensure enough money is being appropriately allocated.
For example, if the company has $100 in capital to invest, it can either give that money to investment projects or use it for other purposes like paying down debt.
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