Definition
Capital allocation is how a company decides to invest cash across growth, maintenance, debt paydown, or returns to owners.
How to use it
- Prioritize projects with the highest risk-adjusted returns.
- Balance growth investments with liquidity and covenant needs.
Common mistakes
- Chasing growth projects without measuring ROI.
- Ignoring opportunity cost when holding excess cash.
Why this matters
This term matters because cash timing and risk are usually the difference between a plan that works on paper and a plan that survives. Use consistent definitions so decisions are comparable over time.
Practical checklist
- Write a 1-line definition for "Capital Allocation" that your team will use consistently.
- Keep the time window consistent (weekly/monthly/quarterly) when comparing trends.
- Segment results (channel/plan/cohort) before drawing big conclusions from blended averages.
- Sanity-check with a related calculator from the same category on MetricKit.
- Read the related guide (e.g., Investment decision metrics: NPV vs IRR vs payback vs PI) for context and common pitfalls.
Where to use this on MetricKit
Calculators
- Profitability Index Calculator: Calculate profitability index (PI) from discounted cash flows and estimate the max investment for a target PI.
- WACC Calculator: Calculate WACC (Weighted Average Cost of Capital) from capital structure, cost of equity, cost of debt, and tax rate.
- Equity Value Calculator: Convert enterprise value (EV) into equity value using cash, debt, and other adjustments (optionally per share).
- Pre-money vs Post-money Valuation Calculator: Convert between pre-money and post-money valuation and estimate investor ownership from a financing round size.
- Pro Rata Investment Calculator: Estimate how much you need to invest in a new round to maintain your ownership percentage (simplified).
Guides
- Investment decision metrics: NPV vs IRR vs payback vs PI: A practical guide to investment decision metrics: when to use NPV, when IRR misleads, and how payback and profitability index fit in.
- Capital budgeting hub: NPV, IRR, payback, and investment decisions: A practical hub for capital budgeting: use NPV, IRR, discounted payback, and profitability index together (and avoid relying on a single metric).