One of an executive’s primary team responsibilities is the decision regarding where to allocate scare resources. If no uncertainty, then no need for decisions. If no decisions, then no need for leaders.
When allocating capital, they are deciding between: investing in existing operations, a merger/acquisition, dividend payment, debt reduction, or share buyback. The last one, share buyback, is the benchmark for all other investments, as a company should be better able to calculate the value of buying one’s stock.
When considering different options one must determine:
- Does investment align to our core competencies/strengths?
- How does this help us win where we are playing?
- What is the financial return?
In order to answer the third question, there are several calculations that are commonly used, including: total shareholder return, economic value added, and internal rate of return.
How do you effectively allocate capital?
