Friday, February 12, 2010

Efficient use of capital

Capital, both debt and equity, is expensive. A company must husband this precious resource and constantly monitor its use.

The CFO has the responsibility to optimize the use of capital. Working with the Controller, the CFO must assure that the appropriate information is captures and reported in a meaningful fashion.

In a retrospective fashion, the CFO is responsible for measuring the historical use of capital within the organization. This task is accomplished through a careful monitoring of the allocation of capital to each business activity. Techniques such as the analysis of net capital employed by each product group or function and economic value analysis may be used.

From a prospective view, the CFO establishes guidelines and procedures to assure efficient use of capital. This includes establishment and monitoring of capital expenditures and other commitment of capital, such as leases. Generally, any long-term commitment of resources is subject to review and analysis by the CFO.

The next post will deal with managing the right hand side of the balance sheet.

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