Capital Sourcing

Publication Date :

09 Jan, 2025

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Table Of Contents

Capital Sourcing Meaning

Capital Sourcing is the process of acquiring funds and assets that help in the manufacturing or production of goods and services. It forms part of every business to ensure that the daily operations, including asset building, are appropriately conducted. The technique mainly focuses on buying fixed capital assets, like machinery, equipment, inventory, production facilities, and so on, to carry out and/or boost production.

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Businesses face challenges while raising capital, especially when the venture is new. Capital sourcing involves creating a strategic business plan based on how an investor will perceive it and make a go-or-no-go decision. This process is often referred to as capital procurement.

Key Takeaways

Capital sourcing refers to businesses investing in long-term fixed capital assets such as production units, machinery, equipment, factories, and entire facilities.
The process starts with identifying needs, budgeting, vendor selection, purchasing, and installation, and finally ends with long-term maintenance and management of assets.
Contrary to this, capital sourcing for a startup refers to reaching investors, pooling funds, and creating products and presentations to pitch them for potential funding and resources.
It is significant in value and is considered a long-term, expensive investment; hence, a proper strategic process is followed to ensure that it reaps profit and shapes the company's future.

Capital Sourcing Explained

Capital sourcing refers to investing in fixed capital assets bought to expand, contribute to, and elevate the pace of the business's production of goods and services. In business and finance, it is an ambiguous term used for different concepts. For instance, when it comes to startups, new business venture capital sourcing involves impressing investors and locking new fund investments for the company's growth. It includes creating strategies and presentations, reaching out to venture capitalists and investors who could potentially be interested in the business ideas, and pooling capital and resources from multiple sources. Based on the kind of pitch, nature of the product, and understanding of the business, the investors decide whether to invest or not.

In capital procurement for businesses, companies try to invest in factories, land, offices, hiring talent, heavy manufacturing machinery, large-scale equipment, production units, and the entire infrastructure that directly contributes to the business operations and, at the same time, increases the company's market value, productivity, and efficiency. When companies purchase such assets, they eventually build long-term capital assets for themselves.

Capital sourcing is an important aspect of strategically planning a company's growth and future profitability. The entire process needs to be performed with well-researched data and information to identify the areas that need to be addressed. Otherwise, investing in capital assets that do not reap profits can be a bad financial move for any company because, unlike routine purchases, this procurement process focuses on capital assets that are long-term and expensive investments and directly impact the business's operational efficiency.

Process Steps

The steps of the capital sourcing process are as follows -

Assessing needs - Businesses, in the first step, must identify the particular needs and requirements that can be solved with new capital investments.
Budgeting - Management prepares, allocates, and approves a budget after deducing the financial viability and ability to buy capital assets.
Seller's choice - When it comes to finally buying fixed capital assets, the process includes searching for the right vendor, checking out price quotations, negotiating, and finding a good deal with the best value for money.
Purchase and installation - In this step, the final purchase is made, and the overall installation of the capital asset, whether it be a production facility, machinery, or manufacturing equipment, along with the entire infrastructure, is completed.
Maintenance and management - The final step is critical as it involves proper maintenance and management of the capital asset to ensure it lasts throughout its life cycle and offers optimum benefits in terms of performance and efficiency.

Examples

Below are two instances that help understand what is capital sourcing better:

Example #1

Suppose a plastic bottling plant produces 45,000 plastic bottles every day. The company recently made a huge profit, as recorded from different cash inflow sources. The management decides to perform capital sourcing and invest in new machinery and equipment to improve the volume of bottles produced. They also perform research and select the right market vendor.

After the final purchase and installation, the new machinery is put to use, dramatically increasing production to 63,000 plastic bottles every day. Though many other operational costs were reduced, the maintenance cost of the machinery increased, which seemed justified given the profits reaped.

In this example, the company bought a fixed capital asset, which elevates the company's value and directly contributes to its growth.

Example #2

In May 2024, an article indicated the use of Artificial Intelligence in human capital sourcing, which could be yet another opportunity for the technology. Bruce Morton from Allegis Global Solutions (AGS) talks about service procurement empowered by AI, which could help businesses find people for different projects. Morton, along with other colleagues, advocated the partnership of AGS and Globality, an AI procurement platform, to show how investing in AI and machine learning tools in the right direction can bring a huge shift in capital sourcing. The company adds that using AI and machine learning to help businesses streamline their sourcing should go beyond goods and delve into human services.

Importance

The importance of capital sourcing in a business plan is listed pointwise below -

Based on strategic capital sourcing, investors make investment decisions related to a new company.
The capital assets bought eventually help in business and operational expansion, increasing the company's value.
When companies invest in capital assets like machinery and equipment, productivity and profitability are automatically increased by reducing labor costs.
With sufficient capital, businesses can plan, hire employees, invest in marketing their products, and offer better services.
Good capital sourcing represents how well a company plans its budgets, expenses, debt, fund allocation, and utilization.