Corporate Financial Strategy: Capital investment

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Corporate financial strategy is a way to complement business strategy, to get the most long-term value out of a company. It is about how organisations raise funds, and how they apply them.

In applying those funds to investment opportunities, capital investment, we have to look at the costs and the benefits.

We have to be clear about the benefits to start with.

  • What are we trying to achieve, and why?
  • What alternatives have we considered, and is this proposal the best way to achieve those aims?
  • Can we quantify them financially, and what do we do if we can’t?
  • What are the risks involved?

And having specified the benefits, we then move to the costs. Generally, costs can be quantified in money terms. And what we’re interested in is what changes as a result of making this investment. So, what monies will be spent that we would not otherwise be spending? Or what will we save that we would otherwise have spent?

Once we have those numbers, we can feed them into a relatively simple analysis tool and come up with a first view of whether the figures make sense. The result indicates what should be done. But it’s only a number. We then have to apply our judgement as to whether this is the best use of the organisation’s resources – the decision is rarely done just on the numbers.

 

Our work in this area at Cranfield is one of the areas explored within the Finance for the Boardroom programme - one of our specialist programmes designed to develop appropriate skills for non-financial professionals and frameworks to successfully improve financial performance and shareholder value in your organisation.

Blog produced by: Professor Ruth Bender, Emeritus Professor of Corporate Financial Strategy and Programme Director of Finance for the Boardroom, Cranfield School of Management

 

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