Management SummaryStern Stewart Research // Volume 41
Looking at the trend of available financing from the beginning of the recent global financial crisis not only highlights the potentially high cost of debt and equity financing according to the borrower, but also the issue of scarcity, or the fundamental lack of available financing. This lack of financing is rising and, along with it, the cost of missed investment opportunities is increasing. However, there is good news for those firms able to raise funds or generate capital internally: There are attractive investment opportunities available including potential acquisitions and strategic asset purchases that, if pursued in the near-term, will allow such firms to emerge as the winners from the financial crisis over the long-term.
Active capital management has become one of the major levers of internal financing in the crisis and one that will likely remain in the post-crisis environment. As a discipline, active capital management focuses on three principal areas:
- New investments and consolidation of existing investments –
Disciplined management of fixed assets and disengagement from programmed capital allocation mechanisms as well as from “must-do investments”
- Systematic reduction of working capital –
Freeing up cash through improved operational processes that increase working capital turnover
- Organizational alignment around cost of capital and cash discipline –
Deliberate integration of the cost of capital and cash flow targets within planning and performance measurement systems and processes
Relentlessly questioning the deployment of capital pays off. Therefore, it is essential to break with the existing conventions and programmed investments in order to successfully identify and manage near-term cash generating opportunities. The potential long-term rewards are significant for those firms that execute successfully.
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