Capital Reinvestment Strategies

TECHNICAL PAPER
ON

CAPITAL REINVESTMENT STRATEGIES

Prepared by – Member ID - 49366

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Capital Reinvestment Strategies

INDEX

ABSTRACT

CAPITAL REINVESTMENT STRATEGIES

1.0 PREAMBLE

2.0 DEFINITIONS

3.0 INVESTMENT Vs REINVESTMENT

4.0 AREAS OF REINVESTMENT

5.0 CONCLUSSION

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ABSTRACT

This Technical Paper on Capital Reinvestment Strategies mainly discusses on

the Capital Investment made on a particular Business Venture, Revenues
generated, Profit / loss distributions, Speculations and finally Reinvestment
options with in the same and / or related and / or new avenues of investment
opportunities. Various considerations and constraints namely the Balance
Sheets, Share holder’s interests, Business Longevity expectations, Expansion
Plans, Diversifications, Financial Participations, Financial Institutions, Statutory
Regulations, Governmental Regulations, Global Economic conditions and
Financial Markets.

An overview of major and minor impacts on the Reinvestment decisions have

been discussed with respect to the conditions as listed above. It is imperative
to understand that Capital Reinvestment is highly a subjective decision. Hence
this paper is made as an outline analysis only on the subject matter for the
non-financial managers to get involved in the decision making process. This
paper also tries to define various forms of Investment patterns and investors
interests that influence the Reinvestment decisions.

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CAPITAL REINVESTMENT STRATEGIES

1. PREAMBLE

This Technical Paper on Capital Reinvestment Strategies is an overview on

Managing the Generated and Surplus funds from a Business unit. It is very
important to understand pre-hand that, money managing decisions are highly
subjective and are the decision made to suit the opportunities and interest of
the investors. This paper deals with probable opportunities, constraints,
limitations and regulations involved in such Reinvesting Decisions.

Before entering in to the subject, it is important to understand the

characteristics of funds that are involved in the business. At the start of the
Business, the investment made will be sourced from many ends like Shares,
Loans (long term & short term), Credits, deposits, etc. During the operations
stage, the funds will be accounted to various operational expenses, Taxes &
Duties, Dividends, Retained to account depreciation and Surplus funds. Cash
under each heading have its own implication in the Business and the statutory
accounting. Understanding the fund available for Reinvesting itself is an art
and so, managing such funds needs clear guidelines under various conditions
and constraints. This paper discusses such conditions and constraints and
tries to arrive to some structured guidelines on Reinvestment strategies.

Though there is no clear formula for decision making, a clear thinking on step
by step analysis as discussed in this article can help the decision makers to
focus better.

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2. DEFINITIONS

2.01 Capital

In generic terms, Capital is defined as the money available for investment into
a business or in an opportunity that can potentially multiply the invested
money to generate profits.

Such capital shall be sourced from investors, Investment Banks, Loans,

Deposits, Premiums and many other forms. They are raised for investment
purposes with a definite goal and more importantly commitment of returns.
They can also be defined as funds committed to perform.

2.02 Audit & Balance Sheet

Business operations are periodically audited to evaluate the performance of

the investments made. Such Audited reports are publicized for the interest of
the investors and general public in the form of Balance Sheet during Annual
Closures. In a short, a Balance Sheet provides track of funds handled during
the current year and a profit / loss statement will be arrived based on the
cash movements, which are Expenditure and Revenues. Then the cash
balance is further adjusted for Depreciation, Liabilities / Credits, etc before
Taxes and Duties. Further cash in hand statement is arrived to account profit
/ loss of the financial year. In case of the surplus cash is dispersed to the
investors by means of Dividends. Finally the available Capital, Surplus funds
and Credits are declared as cash in hand / bank. A typical Balance sheet is
presented in “Exhibit 1” in the annexure section.

2.03 Capital while Operations

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Balance sheet identifies the following major Cash reserves with the Business
units based on the revenue and in turn profit made during the current year.
They are actual cash that are after all the Expenses, Repayments, Taxes &
Duties and dividends
 Cash towards Depreciation (over the years – cumulative)
 Cash Credits
 Cash Liabilities
 Cash in hand / bank

It is obvious that the cash towards Depreciation will always be needed for
current operations augmentation and to keep the productivity levels in pace.
Rest of the cash that balances items 2, 3 & 4 above, is treated as Surplus
Money and this normally accounted to Capital gain.

2.04 Reinvestment

Generated capital as discussed above shall be made available for further

investments and this is defined as Capital Reinvestment. Depending on the
Business prospects this capital shall be invested in to the following major
segments.
 Scaling - (Re-Investing in the same Business)
 Acquisitions / Integrations
 Diversification in to new industries
 Stock investments & Financial Trades
 Property (real estate) investments / Developments
 Speculations and Hedging
The above are major openings for the current day investments.

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3. INVESTMENT Vs REINVESTMENT

3.01 Differences

The significant difference between Investment and Reinvestment is as below

 Investments fetch prime return, which is the main interest of the
investors. In case of Reinvestment, the return on such investment is
additional revenue to the investors.
 Investments go with time bound pattern and they have accountability
for the debt / equity ratios. In Reinvestments, risk of debts evading the
capital is not there and the capital is available for ready investment.
 Investments are mostly made after Risk evaluations, third party
analysis, etc. But Reinvestments are made mainly on the investor’s
experience only.
 Investments are done on long term basis and Reinvestments are done
equally on long term and on short term as well (Speculated
investment).

This clearly indicates the differences of Prime Capital and Generated Capital
investments.

3.02 Cash flow control

In today’s fiscal market, Capital Reinvestment works much stronger because

such transactions are based on cash in hand. Also decision making on Cash
flow and control lies entirely with the Business unit with out any influence
from investors. This eases the cash flow and structuring of the flow to the
potential investments easier and viable in case of Capital Reinvestments
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4. AREAS FOR REINVESTMENT

Major Avenues for Capital Reinvestment are already listed under class 2.04 –
Reinvestment. This section will analyze each of such investments with respect
to following interests, conditions and constraints.

 Balance Sheets
 Share holder’s interests
 Business Longevity expectations
 Expansion Plans
 Diversifications
 Financial Participations
 Financial Institutions
 Statutory Regulations
 Governmental Regulations
 Global Economic conditions
 Financial Markets.

4.01 Scaling – (Re-Investing in the same Business)

Scaling or Expansion of Business always stays at top of the Reinvestments.

Returns on such investments can easily be forecasted and risks involved are
well known to the investors. Also performance Auditing of such Capital
Reinvestments are not complicated. A single Balance sheet in the coming
years to denote the entire scaled up Business will ease the understanding of
the business. Scaling does not go beyond the initial interest of the investors
and hence acceptance by investors does not arise. Scaling adds up the
Business Longevity and aids the Expansion plans with out further works for
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the financial institutes or to the new set of potential investors. Decision on
scaling limits funds movements towards diversification. That means,
movement of Generated funds to the new risk areas are restricted. Scaling
can also improve a better financial participation of the investors in the swelled
up business, since it reduces the debt / equity ratio on the overall Capital
investment.

Role of Financial Institutions on the decisions go down with the own money
investments. Statutory & Governmental regulations play a minor role in the
Capital Reinvestment plans. Since the Capital Generated is directly
Reinvested, this money is available with out Auditing and further taxation.

But the major factor that plays on scaling will be Global Economical
Conditions and Financial Markets. Demand – Supply equation can always be a
vital issue in scaling the Business. In most of the Tangible and Intangible
products, the industry enjoys the best benefits as long as the Demands are
above the supply levels. If Scaling reverses such conditions, it affects the
performance of the overall capital (Prime & Reinvested). This may even risk
the business in the Financial and Capital Markets.

4.02 Acquisitions & Integrations

Capital Reinvestment on Acquisitions & Integrations is as safer as Scaling. In

general when such decisions are made, the characteristics and performance
of such investments are already known. Acquisitions are made with full
knowledge of the performance of the Business unit being merged or adopted.
Similarly in case of Integration – upward or backward, such integrations
investments can work in line with the main Business Unit. For Example,
integration of a packaging unit or Marketing office with the manufacturing
office is going to predetermine its production rate, quality and operability in
line with the demands of the production unit. Also the Balance sheet
accounting and Auditing of such units shall easily be merged with the account
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books of the main business unit, since the expenses and revenues of such
units are book accounted. Since the Main Business Units productivity and the
Business Line are not altered much, it still falls in the interest of the investors.

Acquisitions and Integrations mitigate the risks on Business longevity and

expansion plans. The added market comfort by means of Integration gives
rise to Business stability and further gives room for Expansion plans with
forecasted additional revenues in the coming years. Since the Capital
Reinvestment is more focused on line of interest, diversification is limited to
the main product of the Business Unit. That means, this does give way for
entering new business areas and newer products.

As in Scaling, Financial Participation of the business unit increases on the

overall investment and hence assures a better debt / equity ratio, there by
better returns for the further years.

In certain agreements, clearances from financial institutions become

mandatory and even a hurdle point since in line integration shall affect the
Capital Performance in either directions. There are clear advantages with
Statutory and Governmental regulations by reducing number of points of
taxation and duties. Such integrated business units shall enjoy better benefits
on Value Addition Taxation from the regulatory authorities. Since still the
Business unit functions with the same products and the quantum of
production, it is hardly affected by the Product and Financial Markets.

4.03 Diversification in to new Industries

Diversification in to new Industries can be seen as entering a new Business

Area. Any new venture has its own amount of risks involved in it.
Accountability of such new business can not be integrated with the existing
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business. Corporate Financial Auditing becomes more complicated and needs
more efforts. Operations and cost management in case of many diversified
business units become highly complex and any impact on the overall
investment performance shall only be known after Annual Audits. Corporate
Balance sheets become more complicated. Investor’s interest is not met when
diversification decisions are made.

Since the financial performances are not kept very clear, possibilities of
loosing on the existing business performance leads to a threat for the overall
business longevity. Also, on the positive side, if the Capital Reinvestments on
diversification starts earning better, this may shift the investor’s interest to
the new arena and hence the existing business may suffer. IN general, both
the conditions are not much favoring situations for the Financial Institutions
who have investments / interest on the existing business.

Accountability towards Statutory and Governmental regulations do not favor

the situation since the money move to a totally new sector and hence there
could be no capitalization on Tax and Duties benefits. Still this gives rise to
better and healthier position to the overall corporate with a multiple business
presence. This increases the confidence levels on the organization over the
time period and gives better reputation with Global and Financial markets.

4.04 Stock Investments & Financial Trades

This part is Capital Reinvestment is purely exclusive of corporate performance

and market dependent. Business unit and / or investors have the least to
control the performance of the investment. Hence a very thorough
investigation before the investment is a must. Also such investments are

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generally routed through third party agencies and hence the revenues are
shared.

Since such investments are independent of the current business operations,

only cash balance adjustments are allowed on the Corporate Balance sheets.
Since the market is depending on performance of the invested organization or
parties, risks involvements are high. That leads to high returns expectations
compared to the previous types of investments. Since the returns are mostly
reinvested in the financial markets, the actual earned values over time period
is very hard to be assessed. Since these types of investments are made
exclusively from surplus funds, interest from Financial Institutions is not
significant. Investments being outwards, they are more depended on the
Global Economic Conditions.

4.05 Property (Real Estate) investments / Developments

In general, these are long term and safe investments. But Capital
Reinvestment principle is to utilizing the surplus money to generate better
results; such investments are not done much with generated Capitals during
the growth stage of the organizations. Long term investments are thought
only when there is a considerable saving of amounts in hand that can go in
for safer investments. Returns are not as appreciable as in other types of
investments.

Since the returns are independent, Balance sheets shall account only the
revenues generated. But, being a long term investment that barely brings
back periodical returns, these types of investments stay more as expenditure
than returns on the balance sheets. Since there is no quick recovery, this
investment is not preferred much by the investors.

Since Long Term investments can provide more financial stability. Hence such
investments favor the organizations to get a better security levels with the
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Financing Institutions. There are many restrictions and conditions on holding
properties and investments on properties. So, the more legal adaptations are
required to get into Real Estate and Property investments. These investments
are to some extent independent of Global Markets and Economies and hence
give a better stable asset values to the organization on a longer run.

4.06 Speculations & Hedging

This is the modern time opening for the Capital Gain investments. This area
had been dominated by Prime investors till recent years for its high risk – high
returns formula. But now a days, speculations and hedging become source of
quick exchange of liquidity.

5.0 CONCLUSION

As discussed through out the paper, Capital Reinvestment is highly subjective

decision. This needs a good analysis on the investment pattern. Decisions
should be taken based on the phase of operations the organization is passing
through. Since the money being invested is surplus generated out of
investment made, channeling of funds are much easier. Since the interest of
investors is still high on the investments, a due care to be taken while
choosing the investment.

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ANNEXURE

EXHIBIT 1

Coca-Cola Company
Consolidated Balance Sheet - January 31, 2001

Assets
Current Assets
Dec. 31, 2000 Dec. 31, 1999

Cash and Cash Equivalents $1,819,000,000 $1,611,000,000

Short Term Investments $73,000,000 $201,000,000
Receivables $1,757,000,000 $1,798,000,000
Inventories $1,066,000,000 $1,076,000,000
Prepaid expenses and other $1,905,000,000 $1,794,000,000
Total Current Assets $6,620,000,000 $6,480,000,000

Long Term Assets

Long Term Investments $8,129,000,000 $8,916,000,000
Property, Plant and Equipment $4,168,000,000 $4,267,000,000
Goodwill $1,917,000,000 $1,960,000,000
Intangible Assets N/A N/A
Accumulated Depreciation (or N/A N/A
Amortization)
Other Assets N/A N/A
Deferred Long Term Asset Charges N/A N/A
Total Assets $20,834,000,000 $21,623,000,000

Liabilities
Current Liabilities
Accounts Payable $9,300,000,000 $4,483,000,000
Short Term Debt $21,000,000 $5,373,000,000
Other Current Liabilities N/A N/A
Total Current Liabilities $9,321,000,000 $9,856,000,000

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Long-Term Liabilities
Long Term Debt $835,000,000 $854,000,000
Other Liabilities $1,004,000,000 $902,000,000
Deferred Long Term Liability Charges $358,000,000 $498,000,000
Minority Interest N/A N/A
Total Liabilities $11,518,000,000 $12,110,000,000

Shareholder's Equity
Misc. Stock Option Warrants N/A N/A
Redeemable Preferred N/A N/A
Preferred Stock N/A N/A
Common Stock $870,000,000 $867,000,000
Retained Earnings $21,265,000,000 $20,773,000,000
Treasury Stock ($13,293,000,000) ($13,160,000,000)
Capital Surplus $3,196,000,000 $2,584,000,000
Other Stockholder Equity ($2,722,000,000) ($1,551,000,000)
Total Stock Holder Equity $9,316,000,000 $9,513,000,000
Net Assets $7,399,000,000 $7,553,000,000

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