Corporate finance

Corporate finance, the raising and management of funds by a business organization. Planning, analysis, and control activities are under the responsibility of a financial manager, who is usually located at the top of a company’s organizational structure. In very large companies, important financial decisions are often made by a finance committee. In small and medium-sized businesses, the owner-manager is usually responsible for financial operations. Much of the day-to-day work of corporate finance is done by lower-level employees. Their work includes handling cash in and out, borrowing regularly and on an ongoing basis from commercial banks, and developing cash budgets.

Financial decisions affect both the profitability and risk of a company’s operations. For example, increasing cash holdings reduces risk. However, because cash is not a revenue-generating asset, converting other types of assets into cash reduces a company’s profitability. Similarly, while taking on additional debt can increase a company’s profitability (because borrowed funds allow the business to grow), increased debt means increased risk. It is the finance department’s job to find a balance between risk and profitability in order to preserve the long-term value of the company’s securities.

Short-term financial transactions

Financial Planning and Control

Short-term finance operations are closely related to the financial planning and control activities of a company. This includes the analysis of financial indicators, profit planning, financial forecasting and budgeting.

Financial Ratio Analysis
A company’s balance sheet contains many items that don’t have any clear meaning by themselves. Financial ratio analysis is one way of assessing their relative importance. For example, the ratio of current assets to current liabilities gives an analyst an idea of ​​a company’s ability to meet its current obligations. This is called a liquidity ratio. Financial leverage ratios (such as debt-to-asset ratios and debt-to-total capital) are used to evaluate the benefits of raising funds by issuing bonds (debt securities) instead of stock. Activity indicators related to the turnover of asset categories such as inventory, accounts receivable, and fixed assets indicate how intensively a company is using its assets. A company’s main business objective is to obtain a satisfactory return on invested capital, and various profit indicators (profit as a percentage of sales, assets, or net assets) indicate the extent to which this objective has been achieved.

Financial Forecasting

Financial managers must also prepare an overall forecast of future capital requirements to ensure that funds are available to finance new capital expenditure programs. The first step in preparing such a forecast is to obtain estimates of sales for each year of the planning period. This estimate is prepared jointly by the marketing, production, and finance departments. The marketing manager estimates demand, the production manager estimates production capacity, and the finance manager estimates the availability of funds to finance new accounts receivable, inventory, and fixed assets.

Profit planning

Key figure analysis refers to the current operating situation of a company. However, companies also need to plan for future growth. This requires decisions regarding the expansion of existing operations and the development of new product lines in production. Companies must choose between different degrees of mechanization or automation, that is, production processes that require different amounts of fixed capital in the form of machines and equipment. This increases fixed costs (relatively constant costs that do not decrease if the company is not operating at full capacity). The higher the proportion of fixed costs in total costs, the larger the scale of operations required to achieve profits and the more responsive profits will be to changes in scale of operations.

Trade Receivables

Trade receivables are loans that a company makes to its customers. The amount and terms of such loans vary from company to company and country to country. For example, a U.S. manufacturing company may have an accounts receivable-to-sales ratio of 8-12%, which corresponds to an average collection period of about one month. A company’s credit policy is based on the practices of its industry. Generally, a company must meet the terms offered by its competitors. Of course, much depends on the creditworthiness of each individual customer.

Cash Plan

One of the most important ways to forecast a company’s financial needs is a cash plan, which predicts the overall effect of planned operations on the company’s cash flow. A positive net cash flow means that the company has excess funds to invest. However, if the cash plan shows that an increase in operating volume will cause a negative cash flow, additional financing will be required. Thus, a cash plan shows the amount of funds required or available on a monthly or weekly basis.

Inventory Levels

All businesses must keep goods and materials in stock. The amount of investment in inventory depends on a variety of factors, including the level of sales, the type of production process, and the rate at which goods deteriorate or become obsolete. Wine Barrels You are taking an inventory of wine barrels in the cellar of a Northern California winery. Comstock The problem of controlling inventory is essentially the same as that of controlling any other asset, including cash. Basic inventory must always be available. It’s a good idea to have safety stocks on hand because the unexpected can happen. They represent a little extra money needed to avoid costs incurred due to defects. You may need extra quantities (spare stock) to accommodate future growth needs. Finally, part of inventory creation comes from savings that come from buying in bulk. Whether it’s raw materials, capital, or plant and equipment, it’s always cheaper to buy more than you need immediately.

And the finaly Reorganization

When a company can no longer operate profitably, the owners may seek to reorganize the company. The first question that must be answered is whether it would be better for the company to go out of business. If it is determined that the company must continue to exist, it must go through a reorganization process. Legal procedures are always costly, especially when a company goes bankrupt. Debtors and creditors alike are often better off resolving their issues informally rather than in court. Informal procedures used in reorganization procedures include .extensions to provide a grace period for payments on outstanding debts and (2) settlements to reduce the amount of debt. If voluntary agreement by extension or compromise is not possible, the matter must be brought before the court. If the court chooses restructuring rather than liquidation, it will appoint a receiver to manage the company and draw up a formal restructuring plan. The plan must meet the criteria of fairness and feasibility. The concept of fairness includes the appropriate distribution of proceeds to each beneficiary, while the test of feasibility includes the ability of the new company to bear the fixed costs arising from the restructuring plan.