Corporate Finance Source Corporate Finance Los Angeles Investment Banking Firm Xnergy, LLC
Posted: Thursday, April 06, 2006
by Brian Bredenkamp
global solutions consulting
Corporate Finance
By Xnergy, LLC
Nia Stefany
Corporate finance is a function that deals with the financing needs of a company. A lot of money is required to fulfill the company’s objectives, implement of technologies for the reduction of operating costs, encounter marketplace ups and downs a bit more easily and compete with the competitors. Customers cannot be the sole contributors of cash, which is required in abundance to realize all these essential financing needs. The company must have other sources of capital as well. Corporate finance is the realm of tactics used to increase cash flow as well as make practical investment decisions in such a manner that the company starts registering growth in all spheres.
The managerial organization of every company includes corporate finance executives, whose primary job is to make financial decisions for the company. Although these financial decisions may vary depending upon the nature of the company, but all of them are concerned with enhancing the corporate value of the company by ensuring that the return on capital always exceeds the cost of the capital, without taking excessive financial risks.
Corporate finance decisions can be segregated into two categories viz. long-term decisions, also called capital investment decisions, and short-term decisions, commonly known as working capital management. While the former is concerned with decisions on fixed assets and capital structure, the latter includes decisions that manage short-term assets and short-term liabilities in such manner that the company has sufficient cash flow to fulfill the maturing short-term debt as well as forthcoming operational expenses.
Long-term corporate finance decisions comprise of an investment decision, a financing decision and a dividend decision. The investment decision relates to the selection of assets in which the company will invest funds. Corporate finance executives estimate the value of each asset before making the capital allocation decision. Thus, the investment decision is broadly concerned with the asset mix or the composition of assets in which the company must make the investment.
The second component of capital investment decisions is the financial decision, which relates to the choice of the proportion of debt and equity capital sources to finance the investment requirements. Dependent upon the financial decision is the dividend decision where the corporate finance managers decide whether to distribute the company’s profit as dividends to shareholder or to retain for investment in the company itself. This decision depends upon the dividend payout ratio, preferences of the shareholders and the investment opportunities available, and the dividend policy of the company.
Short-term survival is prerequisite for long-term success. Therefore, working capital management or short-term corporate finance decisions are an important and integral part of financial management. Working capital management is primarily concerned with the management of current assets, and for this corporate finance managers have to take into consideration the trade-off between profitability and liquidity.
If the company doesn’t have adequate working capital to invest in current assets, it may become illiquid and invite the risk of bankruptcy. If the current assets are too large, profitability is adversely affected. One of the major dimensions of working capital management is to think about the key strategies and considerations in ensuring trade-off between profitability and liquidity.
Whether long-term or short-term, corporate finance decisions are ever-evolving depending upon the financing needs of the company. The ultimate aim of the corporate finance discipline is to ensure the success of the company as it moves forward.
Nia Stefany
Managing Partner
Xnergy, LLC
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