Working out Capital Management: A Beginner’s Guide to Corporate Financing
October 24, 2018 Gerald Mwangi - , CEO
Extreme returns, reduced financial risks, well, every firm proceed with an outlook that revolves around such forecasts during capital budgeting. The term associated with such actions is corporate financing.
More about Corporate Finance
Financial setbacks are part of every organization’s growth phase. Corporate finance deals with decisions that affect the economic affairs of an organization. For every new adding deal, an organization’s financial needs keep burgeoning, whether they like it or not, a proper capital budgeting or investment analysis will be done to decide on the investment funding.
Irrespective of stock market pressures, every corporation has some say to their respective shareholders. Under corporate financing through strategic decisions managers are to take that responsibility by increasing the shareholder value principle.
What is Shareholder Value?
If there is a healthy return on invested capital, then, the shareholders are conferred with rich dividends or an increase in their respective stock prices. If this jargon needs a simple explanation then, it is a free cash flow that remains after every creditor is paid. On the final note, we can go with the conclusion that shareholders are the last to get the benefits if any.
As a corporate financier of a firm, the issue of concern should always be regarding the allocation of capital resources that can enhance the shareholders financial worth. Apart from rich dividends, managers should see that capital funds are invested properly in valuable projects.
Sources of the Capital Structure
Corporate finance, we can say is the backbone of every firm as it tracks every income and expense, thus maintaining the overall financial health. It should be an adage for corporate finance executives to keep investors happy by optimizing the cash flows while managing the never-ending challenges.
The reality is, with reduced cash flow most of the organizations have witnessed collapses in the growth, but surely we can find several financing sources that will not allow us to lay back and see. Every source of finance is analyzed in accordance with time-period, ownership, and the magnitude of business involved.
Under equity financing, investors fund a business in exchange for share or preferred stock. Even though the eventuality of risk involved is very high investors gamble as they get some leverage over the ownership of business. Corporations under such aid should make positive investments to increase their shareholder’s value while optimizing the value of their stock in the market.
Unlike debt securities, the investors here are not entitled to any sort of periodic payments and only in the event of bankruptcy, they will be paid with some rate after the creditors are compensated.
A traditional financing approach; here the investors are paid periodically along with the interests. A thing to be noted under debt financing is, the corporation need not sell or share its ownership with the investors. A time-bound activity, debt capital is generally sought by firms that are either going for an acquisition or funding a long-term project.
Debt financing can be an expensive choice for corporations seeking a systematic approach. Investors here are merely creditors, and will not have any kind of authorization in the event of resolutions.
Preferred or Hybrid Financing
A kind of financing that has a higher authority over common stock; preferred stock features properties that are not available in either debt or equity financing. In the case of liquidation, preferred stockholders get the first privilege to access assets or dividends over common stockholders.
If we have to rank preferred stocks, then they are higher than common stocks but inferior to bonds in terms of any kind of claims.
Financial Risk Management
In the event of economic transactions, it is a common practice to witness adverse changes in the stock market. Credit risk, market risk, well one can find so many setbacks that needs to be identified and systematically addressed.
A simple theory that tells, unlike investors, the financial managers should not take chances as the financial market is never a stable niche. Market risks can be unpredictable that needs to be hedged through well-defined strategies and financial instruments.