Posts Tagged ‘Debt’

Optimal Capital Allocation Strategies: CFOs Pondering Business Systems Agility and Resilience

November 23rd, 2022

What are the functions of CFOs? How do firms determine the optimal capital allocation strategy- best mix of debt, equity, and internal financing that maximizes the return on invested capital? How do firms choose their capital structure? How do firms align and integrate their business systems and processes to facilitate learning, coordination, collaboration, and innovation? These strategic questions relate to business systems agility and resilience in disruptive, emergent and dynamic circumstances; and the optimal capital allocation strategies and capital structure of a business enterprise-the appropriate mix of debt and equity that maximizes the return on investment and shareholders’ wealth while minimizing the weighted average cost of capital (WACC), simultaneously.

While disruptions often reveal the potential vulnerabilities of business systems, processes, and procedures, they also provide insights into business agility- capacity for rapid change and for flexibility in operations and resilience- ability to anticipate, recover from disruptions, emergencies, withstand or recover quickly from difficult and adverse conditions. Clearly, effective capital allocation strategy is vital to a sound business strategy designed to maximize the wealth producing capacity of the enterprise. In these series on optimal capital allocation strategies, we will focus on business systems and processes agility and resilience and provide some practical guidance. The overriding purpose of this article is to highlight some key portfolio of CFOs as we ponder industry best practices in business systems agility and resilience. For specific financial management strategies please consult a competent professional.