What's the difference between a business that thrives and one that stalls? 🤔
The answer is almost always smart capital management, specifically how that capital is deployed.
Spend wisely, and your business survives and grows. Spend carelessly, and you risk failure.
If you're in finance, you know that tracking every dollar is essential. However, simply knowing where your money goes isn't enough. To truly drive growth, you need to master the art of strategic capital deployment.
Our guide will help you to optimize the capital deployed and help transform your financial strategy into a powerful catalyst for real business growth.
Topics covered:
- The meaning of 'capital deployed'
- Why you should care about optimizing it
- How to calculate deployed capital
- Optimization strategies
- Mistakes to avoid
- FAQs
- Download your free capital deployment checklist
What does capital deployed mean?
Capital deployed refers to the money used to run and grow a business. This includes funds invested in equipment, inventory, projects, operations, and other business activities that are meant to generate returns.
Make sure you don't confuse capital deployed with capital raised. Capital raised is about getting the money in—through loans or selling equity. Capital deployment, on the other hand, is about what you do with that money - how you allocate it and use it to grow the business.
You can gain deeper insights by focusing on some key metrics associated with capital deployed like:
- Return on Capital Employed (ROCE): Measures profitability relative to the capital used.
- Weighted Average Cost of Capital (WACC): This metric represents the average rate of return required by all investors.
- Asset Turnover Ratio: This one indicates how well a company uses its assets to create revenue.
Richard King
Why should you care about optimizing capital deployed?
Poor capital deployment is a major drain on profitability and growth potential. But do it right, and you'll:
- Keep cash flowing and make sure there’s enough working capital to cover short-term obligations.
- Run a tight ship and say goodbye to money-burning projects.
- Fund your next big move with strategic expansion.
- Make investors happy and keep shareholders coming back for more.
How do you calculate capital deployed?
There's no single magic formula because it depends on what you're counting as "deployed." Generally, it refers to the total amount of money a company has invested in its operations, assets, and projects. So, you might look at things like:
- Fixed assets: Property, plant, and equipment (like buildings, machinery, etc.)
- Working capital: Money used for day-to-day operations (like inventory, and accounts receivable).
- Investments: Money put into other companies or financial instruments.
Basically, if the money has been spent to further the business, it can be considered deployed capital.
Strategies to optimize capital deployment
Instead of playing it safe, optimizing capital deployment is about playing it smart. This involves deploying capital in a way that directly supports the company’s long-term goals.
Here’s how you can make that easier:
1. Align capital with strategic objectives
Every dollar should fuel your company's goals. If an investment isn't driving your mission forward, consider cutting it.
2. Balance risk and return
Taking on too much risk can put your capital in danger, but being too cautious can hold back innovation. Finding the right balance is crucial when you're using capital to grow your business.
3. Maximize asset utilization
Every piece of equipment, property, or investment should be earning its keep. Dormant assets show that some of your capital deployed isn't being used effectively - it's wasted.
Now, let’s move on to more tactical strategies. Here are a few tips to help ensure your capital deployed drives growth you can measure.
Let data drive your decisions
Using good financial management tools gives you a much better handle on how your company's money is being used.
By looking at the right data, you can quickly spot which assets aren't performing well and find better places to invest that money instead. This makes it easier to make quick decisions because you can actually see how well different parts of your business are doing.
Introduce new capital budgeting techniques
Capital budgeting is an easy way to evaluate which business investments make the most sense for your company. It helps you make smarter decisions about where to put your money by looking at potential returns and checking if they match what your company wants to achieve. Without good capital budgeting, you might end up wasting money on projects that don't pay off.
There are three main tools that make this evaluation process easier:
- First, Net Present Value (NPV) shows you if a project will add value to your company - if it's positive, that means the project is worth pursuing.
- Next is the Internal Rate of Return (IRR), which gives you a clear measure of how profitable an investment might be.
- Thirdly, the Payback Period tells you exactly how long it will take to recover the money you put in.
Sabrinthia Donnelly
Benchmark your performance
Comparing your company to others in your industry is key. Seeing how successful competitors are using their resources can reveal what works and highlight areas for your own improvement.
By benchmarking your performance against industry standards—looking at how they use their assets and the returns they achieve—you can identify inefficiencies and make smarter decisions about how to deploy capital.
Divestment and reallocation
It's important to keep an eye on assets that aren't performing well and move that money to better opportunities. Don't let your money sit around in parts of the business that aren't giving you good returns. Sometimes, you'll need to make tough decisions like selling off parts of the business that aren't essential, getting rid of old inventory, or stopping projects that don't fit your goals anymore.
When you free up money from these changes, you can reallocate that capital deployed to areas that have better chances of growing and making more profit. This might mean expanding your business into new markets or creating new products.
Debt vs. equity management
Finding the right balance between using debt and equity to fund your business is crucial for growth. Taking on too much debt can be risky because you'll have to keep up with interest payments, which can strain your cash flow.
On the other hand, if you rely too heavily on equity financing by selling shares, you'll end up with less control over your company and lower earnings per share.
As a finance leader, your goal should be to use debt wisely when interest rates are low to help your business grow, while still protecting the value of your shareholders' investment. It's important to regularly check if your financing approach is working and make sure you're not taking on too much debt.
Strategic shifts in capital deployed can unlock new growth opportunities when aligned with data insights and market needs.
Don’t make these common mistakes…
When you're trying to make the most of your company's money, there are some common mistakes you'll want to avoid.
First, be careful not to take on more debt than you can handle - this can limit your ability to run your business effectively.
Another big mistake is not investing enough in things your business needs to grow, like developing new ideas or hiring good people.
It's also important to keep track of how well the capital deployed is actually working. Many businesses fail because they don't properly monitor their financial performance. The best way to avoid all these problems is to make decisions based on real data rather than gut feelings.
FAQs
What does "deployed" mean in finance?
In finance, "deployed" means putting money to work through investments expected to generate returns. It's about strategically using capital, not just holding it. "Deployed capital" simply refers to money that has been invested.
What does "assets deployed" mean?
"Assets deployed" is similar to "capital deployed" but focuses on the specific assets acquired with that money. Instead of just the total investment amount, it refers to the actual things purchased, like buildings, machines, and inventory.
What is the capital deployment phase?
The "capital deployment phase" is when a company actively invests capital to grow the business.
What is the cost of capital deployed?
The cost of capital deployed is the cost to the company of obtaining the invested funds, including interest on debt and the cost of equity (giving up a share of future profits to shareholders).
How do companies raise capital externally?
Companies raise external capital primarily through debt (loans, bonds) or equity (selling shares).
Download your FREE capital deployment checklist
This checklist covers the key steps to ensure every dollar is working hard to drive growth and efficiency. From checking current spending to using data to make smarter decisions, it's a clear roadmap for boosting financial performance and maximizing returns. Great for building smarter capital strategies!
(Download for free below👇)
