Financial Planning & Analysis and Performance Management

18CAPITAL MANAGEMENT AND CASH FLOWLong‐Term Assets

CHAPTER INTRODUCTION

In Chapter 17, we described capital efficiency as a key value driver and explored operating capital in detail. This chapter examines the remaining components of capital effectiveness, including property, plant, and equipment and intangible assets. Figure 18.1 drills down into the components of capital investment and asset management.

FIGURE 18.1 Drill‐Down Illustration: Capital Effectiveness and Asset Management

CAPITAL INTENSITY

The term capital intensity is used to describe the level of property, plant, and equipment (PP&E; also known as fixed assets) that is required to support a business. Capital intensity will vary significantly from firm to firm, from industry to industry, and from one business model to another. Key among the drivers of capital intensity are the nature of the industry, the effectiveness of capital processes, and the degree of vertical integration.

Nature of Industry

Certain industries, such as automotive manufacturing, refining, and transportation require high levels of capital assets. Others, such as consulting, require very little in the way of capital assets. Other industries fall somewhere in the middle of these two extremes.

Effectiveness of Capital Process

Companies that require substantial investments in capital assets must develop effective decision and control ...