Whenever any news of major industry mergers or acquisitions doing round, you will find the investors and the market-watchers are waiting in great anticipation and some turbulent actions at the share indices. Almost the same kind of anticipation or anxiety is evident whenever any announcements of new industry installations are declared. All these major decisions are not any out of box announcements on the part of the corporate houses, but are driven by a series of methodical and systematic study, the study of corporate finance. Welcome to the busy and exciting world corporate finance.
These particular discipline of corporate finance where the study of corporate decisions are analyzed, in order to enhance the revenue, or the corporate value, by taking care of all the possible risk factors is the study of corporate finance.The pundits have divided this branch of economic study into long-term and short-term decisions and principles. These decisions act as the pivot to the decision makers. We will try and have a brief overview of the long and short term decisions.
Very often the corporate houses while deciding on announcing a major acquisition or launching new product or services have to consider how to fund that initiative, whether to finance that with profit share, or to go to people asking for investments, or to opt for credit, and when, whether and how much to pay dividends to the investors. These types of long-term decisions are regarded as the Capital Investment option.A series of interrelated criteria and analysis led to zero down to any Capital Investment option. Decisions like investment, financing, and dividend thus comprise this long-term goal.
a] Investment Decisions
Any corporate house before initiating any projects had to have a proper budget allocation, proper funding for the smooth operation and execution, and also proper estimation with taking care of the all the possible errands and risk factors. Thus the project valuation is an essential tool in investment decisions.
b] The Financing Decision
In order to achieve the goal of corporate investment, monetary flow has to appropriate. Management is therefore required to find and optimal-mix of finance options best to suit the project condition. The finance source usually comprises that optimal mix of equity and debt. The balance has to be maintained in order to control the liabilities of that firm.
c] The Dividend Decision
It is usually the Management's discretion to decide whether to consider the re-investment option, or investing in a fresh project, or return the profit share as dividends to shareholders. This dividend calculation is decided mainly on the basis of company's profit and its future business program.
Thiscorporate finance management tool is basically to monitor one firm's short-term assets and the short-term liabilities, there by ensuring that the firm is able to continue funding its operation and has sufficient cash flow to overcome any maturing short-term debt.Guided by the above principle, Management will use a combination of policies and techniques to monitor it short-tem goals. Following are the mantras set for the Working Capital Management:
a] Cash Flow management
Figuring out and maintaining the cash balance so as to address the operational cost or cash flow on a day to day basis. Also put checks on escalating cash holding costs.
b] Inventory Management
Monitoring the level of the raw material required for uninterrupted daily production, in order to reduce the loss of time, and investment in raw material. These requires supply chain management, re-order level, or the Economic order quantity.
c] Debtors Management
This requires framing an appropriate and attractive credit policy, such that any impact on cash flow for day to day operation can be avoided.
Now you know that whenever such big project and services are announced by the corporate houses to meet their investors expectations , what are behind the scene management activity that ultimately leads to pacify the quest for profit and establishing the turnkey projects.