Businesses must make decisions on a daily basis to keep their enterprises running smoothly. The main objective in corporate finance is to make money for the corporation’s shareholders while simultaneously upholding laws, responsibilities and corporate ethics. There are certain strategic financial issues that come into play, dictating such things as how a corporation should raise and manage capital, which investments the corporation should make, how large a share of profits should be returned to shareholders via dividends, and so forth. Some decisions and strategies focus on the short-term, while other corporate finance techniques and decisions are focused on the long-term projections of the company.
Short-term considerations
Current assets
A corporation’s current assets are assets that may be converted to cash or may be used to pay current liabilities within the next 12 months. Current assets of a corporation usually include cash, cash equivalents, short-term investments, inventory, accounts receivable, and any prepaid liabilities that will be paid within the next 12 months.
Current liabilities
All liabilities of a corporation that will be settled in cash within the fiscal year are its current liabilities. Accounts payable for goods, services or supplies that were purchased for use in the operation of the corporation and are payable within a normal period are considered to be current liabilities.
Current ratio
The current ratio of a corporation is determined by dividing total current assets by total current liabilities. A corporation’s liquidity (i.e., ability to meet short-term obligations) can usually be determined by its current ratio.
As an example, although not a corporation, the federal government of the United States currently has the highest debt to GDP (Gross Domestic Product) ratio in its history. This has precipitated what is being called the “fiscal cliff.” The United States owes more than it produces. Right now, the United States’ debt is 73 percent of its GDP.
Cash management
Managing a corporation’s cash refers to the collection, concentration and disbursement of cash. A corporation’s goal in cash management is to maximize the availability of cash that is not invested in assets or inventories to as to avoid insolvency.
Inventory management
Inventory management is crucial to a corporation’s financial success. If a corporation has too little inventory, it can cost money in lost sales. If a corporation has too much inventory, money can be wasted on storage fees, interest fees and processing fees. Developing inventory management systems is the key to maintaining the correct balance for a corporation.
Sometimes a corporation must disassociate itself from a previously invested project or discontinue carrying a product line. For example, RiT Technologies recently announced that it was discontinuing its Carrier product line. The company will, as a result, record an inventory write-off of about $0.75 million in its fourth quarter financial results, it said in a statement.
Long-term considerations
Capital investment decisions
Decisions related to a corporation’s capital investment focus on its fixed assets and capital structure. A corporation must maximize its value by investing in projects which yield a positive net present value, and must finance these investments properly. If such projects cannot be found in which to invest, a corporation must return that money to its shareholders.
Decisions that maximize a corporation’s value
Investment Decision
Most corporation finance managers try to invest in products that yield a return greater than the minimum acceptable rate of return (often referred to as the “hurdle rate”). Before investing in a project or product, a corporation must determine its value.
Financing Decision
Corporations usually base financing decisions on what will maximize the value of its projects and match the assets that are being finance. The financing mix includes equity and debt. The type of financing should be close to the type of asset being financed.
Dividend Decision
If a corporation does not have enough investments earning the hurdle rate, cash must be returned to the shareholders in the form of dividends. The amount of the dividend should equal the cash left over after the corporation has met all of its business needs. Shareholder preferences will determine whether they wish to receive this cash via dividends, stock buybacks, or spinoffs.
For example, Premier Trading AG recently announced a proposed 10 percent dividend payment to its shareholders. According to a press release by the company, the dividend decision was based on the company’s strong financial position and results over the past two years.