Written by Philipp Stirnemann on October 9, 2018 in Business planning
Identification of capital requirements

It’s not only strategic decisions that are usually connected with additional capital requirements – constant operative activities are the subject of its analysis as well. Long-term capital planning depends on different factors, such as capital expenditure on investment, restructuring, production relocation, etc. In addition to this, external effects, such as exchange rate fluctuation and development of the business cycle, have considerable influence on capital requirements or capital planning. An integrated planning which includes all factors is needed to define capital requirements prematurely, and to take corresponding measures. The consequences of an investment can be noticed after certain period of time; after which it usually has effects on liquidity or equity capital. Expansions have significant influence on liquidity planning, as the need for investments often wears the liquidity situation out.

Effective capital investment

If the consortium consists of many business units or subsidiaries, the question of effective use of the available capital arises. On the one hand, it is applied to banks and insurance companies, which are forced to meet minimum capital requirements for regulatory reasons. On the other hand, it is relevant for simple productions or service providers – which have limited access to the new capital.

To begin with, let’s answer the question why it is necessary to measure effective capital investment. One can choose from a return on equity, on total capital employed or return on investment, etc. When the question of measuring effective capital investment is settled, separate departments may be classified as belonging to a certain group, and the groups may be then optimized.

Capital structure optimization

In connection with effective capital investment, it is logical to mention the optimization of capital structure. As the result of a low interest rate environment, the increase in loan capital is worth doing for the sake of leverage. The change in capital structure can be made in several ways, and still there are dependencies that cannot be tracked without an integrated model. As an example, new loan capital can be taken, or the profits can be returned to the owner. Both variants have effect on liquidity, availability of investment capital, profitability, etc. Investment activity must be adjusted depending on how much capital is available during the following years. Liquidity can change because of cash outflow in the dividend payment – not only during the current year, but over the following years as well. Effective capital planning makes no sense without investment planning, or without taking the liquidity situation into consideration.

Synergy potential

Synergy effects can first be evaluated correctly at the integrated overview, which includes the existing structures of capital budgeting. Often at the time of expansion, products or services of a new business line come into focus, and existing synergy potential is not considered. Consequently, overall benefits of the company are evaluated rather low.

Production relocation

Currently, many companies move their production capacities to cheaper locations to save on costs.  Such shifts or movements of the production naturally influence the whole company. With an integrated financial plan, indirect effects and consequences can be captured long before they become visible. This way, countermeasures (e.g. further funding, extensions of current credit limits) can be planned in advance.

After the shocking situation involving the Franc in January, 2015, it was clear that many companies could not evaluate the influence of Franc appreciation, as it involves several factors. The planning of the possible relocation of production or partnership is a long-term matter. A better means of planning, allowing alternatives to be explored, does not exist.

Funding conditions

Last but not least is the argument of funding conditions. On one hand, they are based on current market conditions, but on the other hand, they are connected with company-specific risks. They are difficult to define and often are the last matter to be considered before negotiations between an investor and a creditor. Often, the information advantage of the company prevents the allocation of the credit, or worsens the conditions because of a high level of insecurity shown by the investor. Disclosure of financial statements and scenarios increases the transparency and reduces insecurity. With stress testing and stress scenarios, extreme situations can be revealed so that counter measures can be planned. This way, not only the company, but potential investors as well, may discover a company’s weaknesses, and the measures required. Furthermore, you show competency to the investor, which has a positive impact on funding conditions.

Reducing financial costs

How can I show the financial efficiency of my project (investment, reorganization, building, start-up, etc.) to a bank or investor – and also save financial costs?

Banks usually ask for pretty simple models of your project to give you a loan, but it is always worth making additional calculations, especially in complex projects. Thanks to a detailed financial analysis, a higher transparency can be created to suit the requirements of the bank. As a result, it increases the willingness of the banks to cooperate, and may lead to better loan conditions.

The same situation occurs with the presentation of your project for investors. With the help of professional graphic editing, you can create a top-quality presentation or report – and make an excellent impression. You should show the investor that you have serious intentions, and pay a lot of attention to detail, even at the first stage of your project. It creates confidence in your professional responsibility and transparency!