Capital investment involves tying up cash, giving up flexibility and taking a risk that may not pay off. But a company that makes the right choices can boost profits.
Capital investments are long-term physical assets such as land, buildings, machinery, vehicles and computer equipment. Companies record them on the assets side of their balance sheets in a category called property and equipment.
Undraising is the process of raising capital, either debt or equity. Most companies raise capital for growth purposes – a younger software firm may look to a venture capital fund to hire new programmers, or an industrial firm may seek out the resources needed to acquire a competitor. These growth motives are not unique, however, and the underlying motivation is the desire to attract investors and a valuation that is at least competitive with other options. Regardless of the source, there has never been a more wide array of options for firms seeking capital funding. The selection of a particular investor and subscription agreement can have a huge impact on the company, and should be carefully considered by management.
Another form of capital investment is the issuance of corporate bonds to retail and institutional investors, who receive semi-annual coupon payments in exchange for their debt. The issuance of debt limits management’s flexibility in how it uses the funds.
Restructuring involves the reorganization of a company and can take a variety of forms. It can be a tumultuous process as jobs are cut and companies rework their internal business structures but it should result in more economically sound production processes.
Executives make capital investments when they buy long term assets that will help the company grow or run more efficiently. The funds for these purchases can come from a variety of sources, including cash on hand but more often through obtaining loans or issuing stock.
Managers often restructure to improve company profitability by both reducing costs and raising revenues. However, the public financial markets tend to reward cost reduction promises much more than they do evidence of revenue enhancements. Therefore, managers must weigh the benefits of their disclosures carefully. In some cases they may choose to keep restructuring plans confidential.
Often, companies must restructure in order to reach new financial goals. For example, a company may need to relocate or acquire equipment. It also might need to merge with another company or change its technology and client base. These changes could mean that certain departments are no longer necessary or that job losses will occur.
Reorganization often involves a significant amount of money that is a direct risk to the company. The company’s operating cash flow may not be sufficient to cover the expected costs and it might resort to borrowing funds. This can have a negative effect on the company’s future earnings for stockholders in the long run.
Reorganization also requires a lot of time and energy. It is important for leaders to communicate the company’s reorg plans and give their staff an opportunity to ask questions. This can be done by conducting question-and-answer briefings, setting up smaller team meetings and through formal surveys.
Capital investment is the purchase of physical assets to further a company’s long-term business goals and objectives. These assets include real estate, manufacturing plants and machinery. A company can obtain capital for these purchases through a variety of sources, including traditional bank loans, venture capitalists and angel investors.
Many assets are assessed based on how liquid they are, meaning how easy it is for them to be turned into cash. For example, a home is not very liquid because it takes time to get it ready for sale, assess its value and find a buyer. Stocks, on the other hand, are very liquid because they can be sold and converted into cash quickly and easily.
The process of liquidation is often part of a plan, such as when an investor sells off assets to realize profits or a company chooses to redeploy its assets in another area it finds more strategic. However, it can also be forced through a lack of funding or the inability to pay debts.