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Allocation of the Capital Effectively

Man uses a paper fortune teller to make multiple decisions for his own portfolio, allocating assets and diversifying in a portfolio to minimize risk for optimal profits. Financial investment concept.

Recently in an interview, Simon Bittlestone, the CEO of Metapraxis shared some insights with us about the Pandemic and the relief measures taken to overcome in the fin corps and financial institutions. He answered few of the most asked questions as how the Covid impacted businesses’ financial plans. Mr. Simon answered saying that the uncertainty bestowed by the Covid-19 pandemic, brought the sense that many businesses have been feeling the strain and extra pressure, especially on their cash flow. The measures such as the Coronavirus Business Interruption Loan Scheme (CBILS) were put in place and because of this, some businesses have been very in effective in providing the much needed liquidity.  It has affected the SMEs significantly and they are much more likely to default on loans compared to their larger counterparts, as a result it is less likely to have a loan approved. A survey conducted in April 2020, showed a negative outlook for the SMEs predicting that many of them would run out of cash in as little as 12 weeks. And while considering the various factors at the time, Metapraxis predicted this time frame could be shorter still, giving some businesses just 6-8 weeks.

The views of the next coming months by Simon is as such, “While the outlook of businesses may have changed continuously since the beginning of the pandemic, it would be naïve to think we are out of the woods. The worst of the economic recession is still to come, so good allocation of capital and effective management of cash flow is now more important than ever.”

He shared some strategies on the factors, businesses needs to consider in order to effectively optimize their outflow. “Financial results depend on how businesses split their capital across different strategies, projects, products or services, as well as various regions. Clearly it would be beneficial to back the most profitable service lines in a time of financial uncertainty, but in order to get this right, businesses need to consider three main points: multiplicity of inputs, complexity of comparison and multiplicity of output. Multiplicity of inputs looks at the number of assets that can be supported. The more assets there are, the more complex the challenge of coordinating capital allocation appropriately. Tied in with that, a business also needs to be able to realistically compare one asset’s return with another’s. This is the complexity of comparison; it is hard for the board to choose which assets to support if they are not directly comparable with each other. Finally, and perhaps most obviously, all of this needs to fit into the overall goal of the business, and what areas it is trying to maximize.”

As it already is a difficult process, the multiplicity of the output is going to change drastically in the coming years when the companies start to consider physical factors such as climatic conditions and its impact, employee wellness and social responsibilities as its outputs.

“Capital allocation has always and will always be at the heart of any business’s operations. This is even more prevalent in times of economic recession when managing cash flow becomes even more vital for survival. When a business has a clear historical overview of its portfolio, how well products or services are performing, and how previous scenarios have affected profitability, it can make more informed decisions when it comes to assessing the impact of an unexpected event. The ability to adapt to fluctuations is hugely important to the board, particularly the CFO, when it comes to successful cash flow management. Agility in financial planning, good scenario modelling and prudent assumptions will allow a business to better weather most storms.”

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