Capital Investment– Fuel for Innovation, Engine for Growth, Fixes the Economy: More Investment Means More Prosperity…

Capital investment that companies make today in new product lines, new equipment and other assets… will determine the valuation of the companies in the future… This leads to a very fundamental objective within capital investment management, i.e., maximize value of the company through astute capital investment, which fuels innovation that propels the growth engine, which is good for the economy…

According to Standard & Poor’s (S&P); despite a modest recovery in capital investment following the financial crisis– capital investment slowed again in 2012 and is expected to contract by 2% in real terms in 2013. Initial forecasts for 2014 are for capital investment to continue to slip, falling by 5% year-on-year. A modest post-crisis recovery appears to be stalling before it has really begun. This downward trend is especially prevalent in Western Europe, which has seen its share of global capital investment fall to just 24% in 2012, and its forecasted to remain steady in 2013 before inching up to 25.4% in 2014…

According to S&P; the emerging markets also look fragile, especially Latin America where the region is expected to experience the weakest growth in business investment of all regions in 2013, in part because of its heavy reliance on the energy, materials and utility sectors… North America, however, is one region S&P expects to increase its share of global corporate capital investment from a low of 24%e in 2009, to 35.6% in 2013 and 36% in 2014… Many economists consider capital investment a vital part of the economy, which generally means that the overall mood of business has a considerable impact on the pace of capital investment and thus impacts the trend of economic growth…

The prime objective of making capital investment in any business is to obtain satisfactory return on capital invested. Hence, the return on capital employed is used as the measure of success of a business in realizing this objective. Return on capital employed establishes the relationship between profit and capital employed. It indicates the percentage of return on capital employed in businesses and shows the overall profitability and efficiency of business… in addition, it becomes a key indicator for the health of the economy: When businesses are profitable, growing, innovating, investing… that’s a vital sign for the economy…

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In the article Capital Management: A High-Wire Balancing Act by ATKearney writes: A tightrope walker daringly takes on a task that is magnified by the possibility of a great fall. A small misstep can have disastrous consequences. However, the performer has a secret: Focus on a few basic principles and follow them perfectly to reduce the chances of making a mistake. Managing multibillion-dollar capital investment is also a balancing act where it’s easy to lose sight of the basics.

People often get distracted by the intricacies of the allocation process, the internal politics, or the complexity of the business case. This last distraction is almost always dealt with by quantifying every aspect of the business case, which may give the impression of managing all the details but in reality often results in at least three symptoms of poor capital management:

  • Failure to prioritize: When capital investments are not linked to corporate strategy and financial targets, it’s almost impossible to capture the required level of returns across the portfolio.
  • Loss of accountability: When accountability are not clearly defined, followed, or enforced, and reviews are not conducted (either while in progress or post-implementation), no one owns the outcome.
  • Poor visibility: Without a corporate-wide reporting structure there is limited visibility into spending and even less control of the investment portfolio. As cost overruns mount and projects slow-down, the economics of the original investment case are      often lost.

In the article Managing Capital by ey writes: Capital is the lifeblood of every fast-growth business. As you continue your journey to market leadership, a strong grasp of what we call the capital agenda should inform all of your important business decisions: Should you restructure your business? Is now the time to sell some of its assets? How can you seize the premium acquisition opportunities? The capital agenda model helps to address these type questions and is based on four key dimensions: Preserving, Optimizing, Raising, Investing:

  • Preserving capital: Fast-growth companies needs to preserve capital. So continuously evaluate your balance sheet, strategy and markets. Look for strengths and weaknesses. Seek opportunities, but identify risks and guard against value erosion. Your ability to access liquidity, manage and release cash, control costs and engage with key stakeholders is essential to preserving capital.
  • Optimizing capital: Capital is precious. Fast-growth companies need a tight grip on the drivers of efficient capital allocation. Greater operational efficiency can release excess cash and working capital. More companies are taking an active approach to business asset management. Such rigor can uncover poor capital deployment, leading to better capital preservation and allocation.
  • Raising capital: Fast-growth companies need to keep their capital needs under constant review. Even if your balance sheet appears strong, external shocks can delay your journey to market leadership. Review your business through the lens of the investment and lending communities. Whether you are refinancing debt or planning for an IPO, you can reduce your cost of capital if you understand the ratios and covenants they favor.
  • Investing capital: Use your capital wisely. Potential backers expect fast-growth companies to make investment decisions supported by in-depth and varied scenario      analyses. Show them you have considered the alternative uses of capital. Communicate a compelling value proposition and focus due diligence on the drivers that matter most.

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In the article Investment Is Understated by Edward Conard writes: An increase in investment by one economy relative to another will likely affect their relative rates of discovery (innovation) and implementation. Successful risky investments in innovation will grow the economy faster than less risky investments and that enlarges the existing business capacities. Also, successfully commercializing good ideas is as important as discovering them and, generally, that requires similarly risky investments…

Innovation expands the economy and benefits consumers by providing better value… As risk takers grow increasingly optimistic; asset values rise. This makes investors and consumers grow increasingly willing to take risks. As risk taking grows, the economy expands, increasing the amount of investment and the value of assets relative to the economy…

A fast-growing company with higher profit margins that is pouring more money into investment than its competitors looks much more attractive to investors, and thus garners a higher valuation. Business investment is good for innovation; innovation is good for business investment…

U.S. companies will make capital investment totaling roughly $2 trillion in 2013, according to research by McKinsey. These capital investments are critically important to future of their companies and the economy; over 50% of corporate growth is directly attributable to capital investment. The companies that manage their capital investment well, significantly outperform their rivals…

Booz Allen found that companies that employ best practices in capital investment management earn 25% higher profits than their peers. With respect to capital investment, today’s top performers are focused on the three key dimensions: Accountability, Visibility, Efficiency. Accountability has many dimensions... Yes, the numbers do have to be right. Having a clean electronic audit trail of all approval decisions and demonstrating that proper controls are in place to ensure compliance with corporate policies is critical…

According to David Straden; real measure of performance in capital investment is ROI. It sounds obvious, yet most companies fail to track and report on actual ROI… If you don’t know how you did on the most important capital investment metric, than what are the chances of driving sustained improvement over time? The simple act of announcing that actual ROI will be tracked will often lead project management to be more realistic with their estimation of potential benefits… Formalizing the capital investment process and imposing rigorous methodology over project evaluation is a step in the right direction…

A second key capital investment management dimension is visibility: The only constant in today’s world is change. In a world where everything is moving faster and faster, the best companies use speed as a competitive advantage. Given the long lead times required for larger investment, it’s arguably even more critical to be flexible and responsive managing capital investment. New opportunities continually present themselves, whether from merger and acquisition activity, new product developments or competitor difficulties…

New threats also unfortunately abound, whether it’s diminished liquidity, fluctuating exchange rates, market forces, competition, political upheaval… To move both quickly and intelligently decision makers must have real-time access to the necessary information… The best companies are proactive in establishing process to give themselves informational context and be prepared to adapt quickly to changing circumstances…

An efficient capital investment approval process is the basic building block: The best companies focus on capital investment efficiency. Doing more with less is a key imperative and being lean means putting capital investment to the highest and best use… It’s not about being smarter it’s about having a better process; one that enhances productivity and leads to greater effectiveness…

Start tracking actual ROI on capital investments, year over year.; that’s the ultimate key performance indicator (KPI) to assess progress in improving performance.. Improving efficiency is the ultimate weapon in a challenging world. Having less doesn’t have to mean achieving less. If you institutionalize accountability, increase visibility and enhance productivity, you can do more with less: More growth, higher profits, and better economy are worthy objectives…