Effective leverage of Economic Capital is one of the 4 key forces of Sustainability. Every company, organization and governing body has multiple sources of existing and available economic capital. Sources of capital can take many forms: cash, debt, outside investment, earned or contributed income, taxes, new markets, strategic partnerships and other variations on these.
Good leaders learn how to balance these sources of capital, seek new ones when needed and avoid those that are too risk-laden. Wise choices around conserving, using and risking capital of all forms contribute greatly to the long-term sustainability of an organization.
Whoever coined the expression Cash Is King knew what they were talking about as insuring enough available liquidity to operate is fundamental. However, an “over-cashed” enterprise is also likely missing out on valuable higher yield institutional or strategic investments that will provide long-term benefits. Yes, Economic Capital can be simplistically defined as a “good balance sheet”, but good balance sheets result from good leadership, and making the best possible short and long-term decisions.
