Poor capital management decisions destroy shareholder value and can even threaten the survival of the business. The need to operate and plan in today’s capital constrained world accentuates the capital management challenge.
Organisations are now, more than ever, focused on developing sustainable capital management strategies to help maximise shareholder value. This involves optimising returns across the full economic cycle.
In current conditions, capital management is becoming a priority item on many boardroom agendas. (And if it isn’t, perhaps it should be.)
Effective decision making starts with asking the right questions. Boards and CEOs are asking their CFOs and financial advisers about the consequences of alternative capital management strategies.
- What is our right gearing level and credit profile?
- Do we know our true cost of debt and its optimal level?
- What is its composition of debt and maturity profile?
- How should we fund acquisitions — debt or equity, or a combination of both?
- What is an appropriate and ‘sustainable’ dividend policy in current conditions?
The answers to these questions will depend on various factors, including the volatility of earnings and the stability of cash flows, the nature of business risks, ownership structures, access to equity markets, financial risk management approaches and current and projected debt and equity market conditions.
Organisations with a strong capital management record typically demonstrate a capital conscious culture that consistently seeks to minimise capital invested and maximise return on capital employed.
KPMG’s Transactions & Restructuring group helps organisations make better capital management decisions.