Definition of capital management
Capital management is the strategic process of allocating capital within an organisation to maximise its growth and profitability. Capital management aims to ensure that the organisation has the right mix of debt and equity funding to support its operations and achieve its financial objectives.
There are several approaches to capital management, but all involve making decisions about raising and investing capital. The most common capital management methods include share repurchases, dividend payments, and issuing new equity.
Capital management allows organisations to make the most efficient use of their resources. By carefully managing their capital, organisations can ensure they have enough money to fund their operations and grow their businesses. You can begin capital management through Saxo Bank.
How to perform capital management
Determine the organisation’s financial objectives
The first step in capital management is determining the organisation’s financial objectives. What does the organisation want to achieve? What are its goals? Once these objectives have been identified, the organisation can develop a plan to achieve them.
Assess the organisation’s capital needs
After the organisation’s financial objectives have been determined, its next step is assessing its capital needs. How much money does the organisation need to raise? How much debt and equity financing will it require? What are the best sources of capital for the organisation?
Develop a capital management plan
Once the organisation’s capital needs have been assessed, the next step is to develop a plan to manage its capital. This plan should include a strategy for raising and investing capital. The organisation should tailor the plan to their specific needs and goals.
Implement the capital management plan
After the capital management plan has been developed, the next step is implementing it. It involves putting the plan into action and ensuring it is followed.
Monitor and evaluate the results of the capital management plan
Once the capital management plan has been implemented, the organisation should monitor and evaluate its results. Was the plan successful? Did it achieve the desired results? If not, why not?
Risks of capital management
Capital management can lead to financial problems
If capital is not appropriately managed, it can lead to financial problems. If the finance operations use too much debt, the organisation may have difficulty financially if its income decreases. The organisation may have difficulty meeting its financial obligations if too much equity is issued.
Capital management can limit the organisation’s flexibility
Another risk of capital management is limiting the organisation’s flexibility. If the organisation has too much debt, it may be unable to respond quickly to market or industry changes. If the organisation has too much equity, it may be reluctant to take risks that could lead to growth.
Capital management can create conflict within the organisation
Capital management can also create conflict within the organisation. For example, if the organisation’s management team and board of directors have different views on allocating capital, this can lead to disagreements and tension.
Capital management can lead to bad decision-making
Capital management can also lead to bad decision-making. If the wrong decisions are made about allocating capital, it can negatively impact the organisation’s financial health.
Capital management can be time-consuming
Another risk of capital management is that it can be time-consuming. Developing and implementing a capital management plan can take significant time, which could be better spent on other business areas.
What to do when capital management goes wrong
Take a step back
When capital management goes wrong, the first step is to take a step back and assess the situation. What went wrong? What can be done to fix it?
After the problem has been identified, the next step is to make adjustments. It may involve changing the capital management plan or revising the organisation’s financial objectives.
Implement the changes
Once the changes have been made, the next step is implementing them. It may require implementing a new plan or changing how the organisation raises and invests capital.
After the changes have been implemented, it is crucial to monitor their results. Do they have the desired effect? If not, why not? What else can you do to improve the situation?