Capital management

Overview

Capital management refers to the area of financial management that deals with capital assets, which are assets that have value as a function of economic production, or otherwise are of utility to other economic assets. Capital management can broadly be divided into two classes:

Working capital management regards the management of assets that are of capital value to the firm or business entity itself. Investment management on the other hand concerns assets that are alternative sources of revenue and normally exist outside of the main revenue model(s) of corporate structures. The discipline exists because assets that are of capital value to business entities or other legal persons require management to aim to achieve optimal, adequate or otherwise sufficient capital performance of the assets at hand. Underperforming capital assets pose a liability to the finances and continued existence of any legal entity, regardless of whether it is positioned in the public sector or in the private sector.

Capital allocation

Capital allocation is a central aspect of capital management. It involves deciding how financial resources should be assigned among competing uses, such as operating needs, capital investment projects, acquisitions, debt reduction, dividends, or share repurchases. In corporate finance, these decisions are commonly evaluated according to their expected contribution to firm value and their consistency with the organisation's strategy and risk profile. Corporate governance frameworks also treat capital allocation as an important management and board responsibility. The G20/OECD Principles of Corporate Governance state that boards are responsible for reviewing and guiding corporate strategy, annual budgets and business plans, setting performance objectives, monitoring corporate performance, and overseeing major capital expenditures, acquisitions, and divestitures.

Further reading

Wilson, Thomas C. (2015). Value and Capital Management: A Handbook for the Finance and Risk Functions of Financial Institutions (1 ed.). Wiley. ISBN 978-1118774632.