Criticial Finance Issues: Financial Times Briefing

WH AT I S IT AND WHA T DO I N EED TO K NOW?

21

Capital allocation

Capital allocation is the choice of which projects to invest in and which to reject.

It is a phrase that implies you have capital rationing, so you can’t invest in every

available project.

Organisational capacity

Would it be wise to invest in every available profitable opportunity even if there

were no limitation on capital? I believe not, firstly because a bad investment can

suck you in and keep sucking the cash from you; secondly because companies

suffer another limitation on their resources, which is organisational capacity. This

comprises both the limited number of people with required skills to manage new

projects but also the processes and relationships that enable any organisation

to function effectively. On the people side of this balance, it can be argued that

new skills can be bought in, perhaps using consultants or interim managers in the

short term. There are, however, three major issues that arise:

1 Scarce skills – these do exist and are often technical skills but also those

relating to knowledge of specific specialist markets; and those that can be

bought in take time to induct into a new business.

2 Leadership – this is a special case of scarce skills. Where a business is

offered an investment in a new field, even if it’s one related to its current areas

of operation, there is an issue with understanding the market at the highest

level within the company. Few businesses will succeed if there is not a deep

understanding of their operations at the highest strategic level because

without this, control and oversight break down. The particular operation may

be starved of investment or over-invested, inappropriate strategies may be

pursued and wrong operational decisions may be taken.

3 Organisation culture – this is often a bigger problem even than specific

skills. All companies and even different activities within them have a distinctive

organisation culture that embraces a shared vision, shared values and ‘a way

we do things around here’. While these are sometimes hard to define precisely

and sound rather indistinct, they are nonetheless a critical aspect of that

organisation’s competitive advantage.

The issue of organisation culture leads on to organisational capacity – the two are

closely related.

O

rganisational culture covers the formal and informal processes that

comprise the organisation and also the web of personal relationships

between the individuals working in a business, who all must cooperate and func-

tion effectively as a team.