If the consortium consists of many business units or subsidiaries, the question of effective use of the available capital arises. On the one hand, it is applied to banks and insurance companies, which are forced to meet minimum capital requirements for regulatory reasons. On the other hand, it is relevant for simple productions or service providers – which have limited access to the new capital.
To begin with, let’s answer the question why it is necessary to measure effective capital investment. One can choose from a return on equity, on total capital employed or return on investment, etc. When the question of measuring effective capital investment is settled, separate departments may be classified as belonging to a certain group, and the groups may be then optimized.
In connection with effective capital investment, it is logical to mention the optimization of capital structure. As the result of a low interest rate environment, the increase in loan capital is worth doing for the sake of leverage. The change in capital structure can be made in several ways, and still there are dependencies that cannot be tracked without an integrated model. As an example, new loan capital can be taken, or the profits can be returned to the owner. Both variants have effect on liquidity, availability of investment capital, profitability, etc. Investment activity must be adjusted depending on how much capital is available during the following years. Liquidity can change because of cash outflow in the dividend payment – not only during the current year, but over the following years as well.
Effective capital planning makes no sense without investment planning, or without taking the liquidity situation into consideration.