An internal capital market is a department within a company that allocates capital to its own business units, increasing control over funds and reducing the chances of fraud. Allocation can change based on unit performance, and additional workers may be needed to properly monitor the units.
An internal capital market is a method of allocating capital and a department within a company that disperses money to other sections of the company. Unlike an external capital market, an internal capital market owns the sections of the company to which it is giving money, which increases control of the funds. One advantage of owning the business units is that it is much easier to monitor who receives the money, which can reduce the chances of fraud. Another advantage is that the department can change the allocation if the money is misused.
There are two types of capital markets: external and internal. With an external capital market, money is lent to outside people and businesses that are not associated with the company providing the money. In an internal capital market, money is sent to the business units the company owns, which generally increases control over the funds unless there are unscrupulous employees trying to steal the money. An external market makes money by charging interest on borrowed money, while an internal market makes money through the projects and work done with the money.
One advantage of using this approach is that the money is much easier to trace than if the money were used by entities outside of the business. For example, the department can talk and check the business unit’s spending to make sure the money is being used correctly, and it can tell the unit how it can and can’t spend the money. The department will also know exactly who is handling the money and exactly where it is going, which can reduce the chances of fraud.
Allocation does not have to be static with an internal capital market, and it rarely is. The allocation of money typically depends on how well the business unit is doing, making it easy for the department to reward successful units and cap capital for unsuccessful units. For example, if a business unit is doing poorly and is unable to turn a profit, then the allocation for that unit will decrease or stop altogether. The money would go to more successful units to help attract more money for the company.
Additional workers may be needed with an internal capital market, which can increase costs. These additional workers ensure that money is properly allocated and tracked. With large companies, this can add a lot to the cost, as many people may be needed to properly police business units.
Smart Asset.
Protect your devices with Threat Protection by NordVPN
