Thursday, January 14, 2010

Corporate Finance Insight - The Capital Management Cycle or Strategic Capital Cycle.


The Capital Management Cycle
The capital management cycle or strategic capital cycle, a core concept of corporate finance, is the circular path involved in managing the flow of capital from the development of market- and mission-based strategic plans that require funding through financial implementation of selected strategic options and back to the planning process. The capital cycle includes three essential components that are both reinforcing and interrelated:
1. a continuous, integrated, strategic financial planning process that effectively balances an organization's strategies with its financial capabilities;
2. a capital structure process that is appropriate to the organization's current financial and credit position; and
3. a capital allocation process that permits the organization to prioritize capital spending decisions in a manner that will improve the services provided while protecting long-term financial capacity.

Managing the capital cycle is absolutely essential to the positive financial performance of any organizations. Senior leaders must understand how to achieve best practice cycle management and must understand the technical and mathematical relationships between cycle components. Success or failure with one component affects success or failure in other parts of the cycle.

For example, without thorough financial planning, an organization will not know whether it is making the best use of available resources funded and allocated through the capital structure and capital allocation processes. Similarly, without access to required debt and equity capital, ensured through effective capital structure management, an organization's strategic competitive plan is "dead on arrival."

Faced with competitive pressures, organizations may be tempted to leapfrog over cycle steps, moving directly from strategic planning to implementing strategic options, for example. However, the long-term financial success of complex delivery organizations depends on developing and maintaining a financial plan, and carefully and deliberately allocating capital.

To succeed in a competitive environment, the capital cycle must be competently managed. This ensures that the organization is positioned to deliver capital resources when and where they are needed to achieve strategic objectives. It also enables an organization to expand and renew capital capacity. Clearly, the long-term success of any organization depends on its ability to make capital investment decisions that will eventually add to and enhance its future capital capacity.

The management of an organization's credit position is an essential component in the successful management of the capital cycle. Improved creditworthiness provides positive momentum to all strategic plans; deteriorating credit has the opposite effect. Throughout the 1980s and the early 1990s, most companies were accustomed to relatively easy credit and, for most of that period, low-cost debt. As a result, organizational creditworthiness was not a priority concern.

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1 comment:

  1. Nice points, implementing them is easy according to me and one can learn what to do for security of the accounts. Good information

    ReplyDelete

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