Managing Debt Capacity: A CFO’s Strategic Approach
Anders Liu-Lindberg
Leading advisor to senior Finance and FP&A leaders on creating impact through business partnering | Interim | VP Finance | Business Finance
Our new book "Communicating Financials to Executives" is now available for pre-order! Order your copy now, as it's available on most major sites. ????????????: https://bit.ly/4h2P9AA ???????????? & ??????????: https://bit.ly/40peQnP ??????????: https://bit.ly/3E38qDD ????????: https://bit.ly/3PHk6OR
This channel is "Trends in Finance and Accounting" with 325,000+ subscribers! Click "Subscribe" to receive a notification and an e-mail when I publish new articles every Thursday and the occasional Saturday.
Listen to the latest #FinanceMaster Podcast episode here.
You can also stream the latest show on YouTube here.
Dive into our LinkedIn Learning course on business impact here.
It's brought to you always by Business Partnering Institute.
Debt is often perceived as a double-edged sword in corporate finance. On the one hand, it provides the capital necessary for growth, innovation, and market expansion. On the other hand, excessive debt can jeopardize a company’s financial health, limiting its ability to respond to unforeseen challenges. For CFOs, managing debt capacity is not just a financial exercise; it’s a strategic imperative.
Debt capacity, the second lever of strategic value creation, revolves around optimizing the balance between leveraging debt to fuel growth and maintaining financial resilience. This balance requires CFOs to think beyond traditional financial metrics and incorporate a nuanced understanding of market dynamics, company strategy, and stakeholder expectations. Here’s how CFOs can take a proactive approach to managing debt capacity.
The Role of Debt in Strategic Growth
When managed effectively, debt can be a powerful enabler of strategic initiatives. It allows companies to fund large-scale investments, amplify returns on equity by optimizing the capital structure, and navigate economic cycles. During downturns, access to debt can ensure business continuity and create opportunities for counter-cyclical investments. However, the key lies in determining how much debt is appropriate. An overleveraged balance sheet can lead to financial distress, while underutilized debt capacity may signify missed opportunities.
Managing debt capacity begins with a thorough assessment of the company’s financial position and strategic priorities. CFOs should evaluate existing debt levels using key metrics like debt-to-EBITDA, interest coverage ratios, and debt-to-equity. Aligning debt strategies with long-term objectives ensures that debt is a tool for growth rather than a risk factor. Industry benchmarks and peer analysis can provide valuable context for setting realistic and competitive targets.
To enhance resilience, CFOs must stress-test their strategies against potential risks, such as economic downturns or interest rate hikes, and engage stakeholders proactively to maintain transparency and alignment. By balancing debt and equity, diversifying debt sources, and managing maturity profiles, CFOs can unlock shareholder value and ensure the company remains financially agile.
Master Debt for Strategic Growth
Debt capacity is not static; it evolves with market conditions. CFOs must stay attuned to external factors such as interest rate trends, credit market sentiment, and economic cycles. Monitoring these variables enables CFOs to time debt issuance or refinancing to optimize costs and maximize strategic opportunities. Well-timed decisions can significantly impact the company’s financial health and ability to pursue growth initiatives.
Effective debt management also requires translating analysis into practical strategies. CFOs should:
CFOs should aim to steer their companies to the industry's top 40% debt-to-equity ratio. McKinsey established this benchmark, which gives companies a significant competitive advantage.
Take the Lead: Leverage Debt for Growth and Stability
Debt capacity is more than a financial metric; it’s a strategic enabler. CFOs who proactively manage debt as part of their broader financial strategy can unlock new opportunities, ensure resilience in uncertain markets, and fuel sustainable growth. The challenge lies in balancing debt's potential with safeguarding long-term stability. By adopting a disciplined, forward-thinking approach, CFOs can position their organizations for lasting success. How are you managing debt in your company?
Stay tuned for the next installment of the "CFO Perspective" series, where we explore the third lever: R&D Investment and its role in fostering innovation and competitive advantage.
This was the third article in our new series, "The CFO Perspective." Here, we dive deep into the levers of strategic value creation that CFOs should work on in 2025. The previous articles in the series are featured below. Remember to subscribe to be notified when we publish future articles.
You can read the previous article series on top trends in finance and accounting in 2025 below.
领英推荐
Dive into our latest series on how finance is driving value creation below. Remember to subscribe to be notified when we publish future articles.
Catch our previous series, "Finance 2035 - what Finance Will Look Like a Decade from Now," below.
Continue reading below for more articles about trends in finance and accounting.
Anders Liu-Lindberg is the co-founder and a partner at Business Partnering Institute and the owner of the largest group dedicated to Finance Business Partnering on LinkedIn, which has more than 12,000 members. I have ten years of experience as a business partner at the global transport and logistics company Maersk. I am the co-author of the book “Create Value as a Finance Business Partner,” a long-time Finance Blogger, a LinkedIn Learning instructor, and a Top Voice on LinkedIn with 400,000+ followers.
OK Bo?tjan Dolin?ek
?? #generationtk
1 个月Good read!
I help firms find the right finance expert remotely within 24 hours: focus on investment talents, VC, PE, FP&A, Controllers, Financial and Data Analysts
1 个月Anders Liu-Lindberg Debt capacity is indeed a crucial lever for strategic value creation. Striking the right balance between leveraging debt for growth and maintaining resilience requires CFOs to align financial decisions with broader business strategy and market dynamics. A proactive approach to managing debt can drive sustainable value while mitigating risks a great perspective!
J'aide les directions financières à se transformer, recruter et gérer les imprévus.
1 个月Thank you for the share!