Capital cash flows

'Capital' is an overused word but in this context it is used to mean 'balance sheet' - that is, capital cash flows which are those related to balance sheet and long-term movements rather than cash flows from trading. Examples include cash spent on tangible fixed assets and cash raised from borrowing, from loans.

Cash is the prime resource that has to be forecast and managed when considering and managing any financial strategy. It is important to understand a business's or individual project's capital spend or disposals along with its working capital cycle and the resultant cash generation or consumption.

To ensure this, management needs to budget for its future cash requirements. Cash flow forecasts and the preparation of these is covered in Chapter 10.

Capital spend (capex), by which I mean cash spent on tangible or intangible fixed assets, is more likely to be under control of the entity as regards amount and timing of the spend, as you do not necessarily have to spend money on new equipment or vehicles, or expenditure can be delayed. The reality that capex is under your control is most clearly manifest by the behaviour of many governments, which often delay or cancel capital expenditure projects. Often, for governments and also for companies, cancellation or delay is too easy an option. For governments, a new highway, for example, will give rise to economic and environmental benefits; for a company, new equipment will bring operating efficiencies. Investing can be a sound strategy and, as Henry Ford reputedly said, 'If you need a piece of equipment and do not buy it you pay for it for evermore.' How true. I have clients in small construction companies who pride themselves on the vans having done 200,000 miles and being on their third clutch. When I point out that the cash spent on maintenance costs would more than cover the lease of a new, and reliable, van, they understand what Henry Ford meant. Investment or project appraisal and its link with objectives and necessary strategies is covered in Chapter 11.

Raising capital from the issue of shares or from borrowing will often be a key aspect of many strategies; however, there is the problem that the raising of funds will be in the hands of others, and you have to make your case for a share/stock issue or for borrowing.

The following quote illustrates the need for cash management in all its aspects:

So why a further 3 per cent share price jump yesterday? Well, news of a €4bn share buyback plan was a happy surprise, as was a promised emphasis on free cash generation and more rigorous capital allocation.

The share buyback is cash going out to satisfy investors, free cash flow generation demonstrates margin, cost and working capital properly managed and more rigorous capital allocation that funds should be invested wisely, to make a decent return.

(Siemens, The Financial Times, 7 November 2013)

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