Capital Allocation

Businesses have to do 2 things well: (1) Raise cash opportunistically, and (2) Deploy that cash intelligently. Raising cash can be done via issuing either debt or equity. A third option is to increase “float” — get customers to pre-pay for their orders, negotiate better payment terms with suppliers, etc. Each has its pros and cons. Managers have to choose wisely. Once cash is raised (or generated via business operations), it can be used in a number of ways. It can just be piled up on the Balance Sheet waiting for an opportunity to come along. Or it can be invested into new/ongoing business initiatives and projects. Or to make acquisitions. Or to pay down debt. Or to reward shareholders with dividends or buybacks. Again, managers have to choose wisely. All these decisions fall under the broad umbrella of “capital allocation”. In this episode, we’ll go over the fundamentals — ie, how business managers should approach these decisions. We’ll also discuss how we as investors can tell whether our portfolio companies’ managers are making these decisions intelligently. Disclaimer: None of this is investment advice. Download the Callin app for iOS and Android to listen to this podcast live, call in, and more! Also available at callin.com