Corporate Finance Advice

Corporate finance advice consists of advising and supporting clients on financing matters, that is, in the acquisition and structuring of debt and equity capital.

This includes, for example, the preparation and conduct of IPOs (Initial Public Offerings), project financing and often also post-merger integration.

Corporate finances must be integrated into every business strategy.

That is why it is important to use capital optimally, to increase the value of the company and avoid risks.

What is corporate finance?

They are the financing of companies and consist of planning, managing and controlling :

• Obtaining funds: financing
• The use of funds: investment.

Corporate finance covers all cash flow flows, which must be planned and controlled specifically and depending on the situation.

Constant control contributes to a stable financial situation in the company.

Corporate finance includes all financial and investment decisions.

Main objectives of corporate finance

Ensure liquidity

The most important and primary objective of business finance is to ensure liquidity.

Without liquidity, the company is insolvent and cannot meet its current payment obligations.

But business financing does not only have the objective of maintaining liquidity.

It also pursues other objectives.

Maximize profitability

Profitability is a business ratio that can be calculated from the relationship between profit and capita.

Depending on the reference value, there are other subdivision possibilities:

• Return on equity.
  Se calcula a partir del beneficio con los fondos propios.

• Return on total capital.
  Para calcular el rendimiento del capital total, hay que tener en cuenta también los intereses del capital prestado y del capital ajeno.
• Sales performance.
  Se puede calcular a partir del beneficio con el volumen de negocio.

In business practice, there are many other profitability ratios that each company selects individually as part of its business management calculations.

Risk management

Within the framework of risk management, the financial risks for the company must be evaluated .
Pueden ser, por ejemplo, las fluctuaciones de los tipos de cambio, de los precios de las materias primas, o el cálculo de la probabilidad de que un cliente no pague sus facturas.

Risk can be assessed with the help of statistical analysis, which would be the analysis of available figures taking into account the past or future-oriented methods.

A future-oriented method consists, for example, of considering different possible scenarios based on the current situation of the company.

This method is also called a worst-case scenario, which describes what could happen to the company in the worst case scenario.

Based on the data obtained in this way, appropriate countermeasures must be taken so that the theoretical risk does not become a real threat to the viability of the company.

Therefore, the general objective of business finance is to find the optimal relationship between profitability and risk.

The business financing process

The business financing process generally always follows the same steps, which are constantly repeated.

And in reality, it never ends, because the financing in the company flows constantly.

1. Determine capital needs

For example, the capital necessary to start the company. Or it could be the financing necessary for an upcoming investment, or the need for liquid funds to cover operating expenses and meet short-term liabilities.

Once the capital needs are identified, the next step would be…

2. Obtaining financing

Financing is to cover the specific needs of companies, and they have numerous options to do so.

• Invest the profits for new purchases.
• Raise external capital by asking for a loan.
• Obtain equity capital by selling company shares.
• Short-term capital needs can be met by taking out a short-term loan.
• Through good planning of the company’s treasury management, especially short-term cash flows, its short-term liquidity can be guaranteed.

3. Materialize the investment

In this case, if capital is used based on objectives, it means that today’s expense represents income in the future.

Afterwards, companies must constantly control the use of capital. If it turns out that the investment is no longer profitable, it is necessary to act on the company.

Ultimately, this can lead to the release of financial resources, for example through the sale of an investment.

What areas belong to corporate finance?

In practice, business finance can be divided into several decision areas, which can have a short-term or long-term decision horizon.

The main areas of activity involve making decisions about:

1. Investments of profits

To manage the surplus profit, and always with the objective of always maximizing the value of the company, management has two options:

• Invest long-term in the capital structure, for example in research and development projects.
• Invest in fixed assets.

If there is no possibility of investing the free liquidity in capital assets or contributing to the capital structure, it must be distributed among the shareholders.

Thus, in the field of business finance, capital investment decisions not only include investment and financing decisions, but also dividend policy.

2. Investment

By nature, the resources available in the company are limited.

Often, different business areas within the company and projects compete for budgets. Therefore, an important task of business finance is to take reliable investment decisions.

As a general rule, projects with the highest return on investment are executed first.

Other valuation methods are:

• Breakeven analysis.
• Net present value method.
• Equivalent annual cost (EAC) method.
• Internal rate of return.

The problem with purely monetary valuation methods is that “soft” factors are usually not considered.

For example, research and development projects can open up completely new opportunities for a company, which, of course, cannot be neglected and are sometimes overlooked.

That is why more flexible tools are used that also evaluate aspects of this type. These tools introduce variables into the calculation and “simulate” various possible developments.

3. Financing

The performance of an investment always depends on whether it is financed with equity, debt or a mixture of both.

Here the company has the task of finding the ideal combination of financing.

To do this, many factors must be taken into account when choosing the appropriate business financing.

The ideal framework is provided by the so-called capital structure policy. .
Determina la relación entre el own capital and long-term foreign capital.

From there, additional capital needs are covered with own funds or debt, as we have seen in the previous section “Determine capital needs.”

Corporate finance also has the task of planning the obtaining of capital with the greatest possible precision in terms of amount and date, so that investment expenses are always covered.

4. Dividend distribution

If, having a positive profitability, there are no investment opportunities, excess liquidity must be distributed among investors.

This dividend also depends on the expectations of shareholders.

In the case of growing companies, called growth stocks, for example, the company’s free cash is expected to be used for self-financing, which will also increase the value of the share.

Another reason to retain surpluses may be to preserve liquidity for future investment opportunities, such as business acquisitions and mergers.

In this case, professional advice is usually sought. .
Por otra parte, un exceso de efectivo puede aumentar el riesgo de un intento de adquisición por parte de terceros.

That is why it is so important that financial management guarantees a balanced and adequate cash balance.

5. Short-term financial planning

It is the management of circulating capital.

Having discussed strategic and long-term decisions in corporate finance, we now turn to short-term operational financial planning.

Also called working capital management. Its main objective is to ensure that sufficient cash is available at all times to cover current expenses and upcoming obligations, in the short term, decisions that affect at most the next twelve months.

The objective is to optimize payment flows and returns in the next planning periods.