Capital commitment

Capital tie-up is an economic indicator for a company not immediately releasable assets of investment and working capital . The opposite is the release of capital .

General

Capital is then bound, if it does not immediately cash may be paid in cash when its convertibility into cash is limited. In companies, the capital commitment plays an important role because the equity and debt capital available to the company must bear interest and therefore also triggers interest expense (debt capital) or a use of profit ( dividend in equity). The existing committed total capital then causes expenses that have to be financed by income from the operational production process. The capital commitment is therefore a flow variable . The question of capital commitment only arises in the company when investments are made, i.e. when production machines are purchased or manufactured in-house. In addition, every inventory of current assets ( warehousing ) leads to a capital commitment. The capital commitment remains in place until the investment object is removed from the business assets or the stored products have been sold.

Capital commitment period

The capital tie-up period expresses the expenditure caused by an investment that is not yet covered by expected income. In the case of depreciable fixed assets (production machines ), the capital tied up is reduced over time by the depreciation , which is recovered via the sales revenues . This reduces the capital tied up during the investment period. The average capital commitment is the arithmetic mean of the residual value of an investment at the beginning of a financial year and its residual value at the end of the financial year: ${\ displaystyle DKB}$ ${\ displaystyle R_ {b}}$ ${\ displaystyle R_ {e}}$

{\ displaystyle DKB = {\ frac {R_ {b} + R_ {e}} {2}}}

The equation assumes that capital goods are written off completely and no residual value remains.

The capital commitment period for current assets is calculated in a similar way. An important key figure here is the cash-to-cash cycle time , which is the sum of various operational sub-processes. The throughput times (DLZ) of a raw material from the incoming warehouse to the production time (including intermediate storage) to the outgoing warehouse are added and the duration of the customer claim up to its payment is taken into account. The DLZ of the supplier liabilities is deducted from this sum, the difference is the cash-to-cash cycle time .

Consequences of the capital commitment

The capital commitment is the basis for determining the capital requirement in a company. The capital requirement begins with a performance-based payout (capital commitment) and ends with a corresponding payment (capital release). In this respect, every investment is the targeted commitment of capital. The shorter the capital commitment, the lower the interest expenses for the necessary capital requirement, because capital can be released through the income generated. A higher capital turnover therefore reduces the capital commitment accordingly.

The main goal of the investment and production processes in the company should be to minimize the capital commitment period. Therefore, measures can be taken to monitor the capital commitment and to optimize it. The just-in-time production ultimately aims to reduce the capital tied up the material store. The capital commitment can also be achieved by shortening the production and sales processes, but also by outsourcing . Lean production serves to shorten the production processes. The cash-to-cash cycle time can be reduced if the supplier payment target is extended and / or the customer payment target is shortened and the throughput times in the incoming warehouse, in production and in the outgoing warehouse are reduced. However, this target definition requires an innovation that increases efficiency, which does not apply to disruptive innovations.

There is particular pressure to reduce the amount of capital tied up on companies that have to maintain extensive production facilities due to the way they are produced. A high level of capital is therefore tied up especially in asset-intensive industries. As the period of time in which the capital is tied increases, the fungibility of the capital decreases . There are fewer capital tie-up problems in warehouse- intensive companies with fast inventory turnover .