How do you measure and monitor the performance and impact of your capital allocation decisions?

1 Define your objectives and criteria

Before allocating capital, it is important to have a clear vision of your desired outcomes and how you will measure success. This should be aligned with your company's mission, vision, and values, as well as with stakeholder expectations and interests. Common objectives and criteria for capital allocation include maximizing shareholder value, enhancing competitive advantage, supporting innovation and growth, managing risk and uncertainty, balancing short-term and long-term goals, and optimizing capital structure and cost of capital. Additionally, you should take into account the trade-offs and constraints that may influence your decisions, such as liquidity, leverage, regulatory, and environmental factors.

2 Use a consistent and transparent methodology

Once you have defined your objectives and criteria, you need to use a consistent and transparent methodology to evaluate and prioritize your capital allocation options. This should include a combination of quantitative and qualitative methods, such as net present value (NPV), internal rate of return (IRR), return on invested capital (ROIC), and strategic fit. It is important to communicate your methodology and assumptions clearly to stakeholders, such as the board, management, employees, investors, and customers. Doing so will help gain their trust, solicit feedback, and ensure they are on board with your decisions.

3 Monitor and review your results

After you have allocated your capital, it is important to monitor and review your results regularly and systematically. Utilizing key performance indicators (KPIs) that reflect your objectives and criteria, such as revenue growth, earnings per share (EPS), return on equity (ROE), cash flow generation, market share, customer satisfaction, innovation output, and risk exposure can be helpful. Additionally, comparing your actual results to expected results, as well as competitors' and industry benchmarks can identify any gaps, deviations, or opportunities for improvement. Periodic post-mortems or audits should be conducted to assess the effectiveness and efficiency of your capital allocation decisions and to learn from successes and failures.

4 Adjust and improve your framework

Adjusting and improving your capital allocation framework based on monitoring and review is necessary. Consider changing market conditions and customer preferences, new technologies, emerging opportunities and threats, feedback from stakeholders, and best practices from peers and experts. Additionally, update objectives and criteria, methodology, and KPIs. Communicate any changes to stakeholders and strive to continuously improve your capital allocation skills and capabilities. This can be done by enhancing financial analysis and modeling skills, developing strategic thinking and decision-making skills, expanding knowledge in your industry or domain, and seeking external advice from experts or consultants. By following these steps, you can measure the performance of your capital allocation decisions, monitor the impact of them, and ensure that you are creating value for your company and stakeholders.

5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?