Corporate Finance Advice
Corporate finance advice means consulting and supporting clients in financing matters, i.e. in the acquisition and structuring of debt and equity capital. This includes, for example, the preparation and implementation of IPOs (Initial Public Offerings), project financing and often also post-merger integration.
Corporate finance is embedded in every business strategy, this is why it is important to use capital optimally, to increase the value of the company and to avert risks.
What is corporate finance?
Corporate finance or corporate financing is about planning, managing and controlling the raising of funds (financing) and the use of funds (investment) in companies.
Corporate finance encompasses all operational cash flows. These are to be planned and controlled in a targeted manner and line with the situation. Constant control contributes to a stable financial situation in the company.
Corporate finance includes all financial and investment decisions.
The main aims of corporate finance
The most important and primary objective of corporate finance is to maintain liquidity. Because without liquidity, the company is insolvent and cannot meet its current payment obligations. The worst consequence is insolvency.
Corporate financing does not have the sole aim of maintaining liquidity. It also pursues other goals.
Profitability is a business ratio that can be calculated from the ratio of profit to capital. Depending on the reference value, there are further subdivision possibilities:
- Return on equity. It is calculated from the profit with the equity capital.
- Return on total capital. To calculate the return on total capital, the interest on borrowed capital and debt capital must also be taken into account.
- Return on sales. It can be calculated from profit with turnover.
In business practice, there are many other profitability ratios that each company selects individually as part of its business management calculations.
Within the framework of risk management, financial risks for the company must be evaluated. These can be, for example, fluctuations in foreign exchange rates or commodity prices, or the calculation of the probability that a customer will not pay his invoices.
The risk can be assessed with the help of statistical analyses (the analysis of available figures is a past-oriented approach) or future-oriented methods.
A future-oriented method is, for example, running through different scenarios based on the current situation in the company. This method is also called a worst-case scenario, i.e. it describes what could happen in the worst case.
Based on the data obtained in this way, appropriate countermeasures are to be taken so that the theoretical risk does not become an acute threat to the company's continued existence.
The overall goal of corporate finance is to find the optimal relationship between return and risk.
The process of corporate financing
The process of corporate financing always proceeds in the same steps, which are constantly repeated. It is never finished, financing in the enterprise is constantly flowing.
Step 1. Determine capital requirements
This may be the capital needed for the start-up of the enterprise. It can be the financing required for an upcoming investment or the need for liquid funds to cover running costs and to service short-term liabilities.
Once the capital needs have been identified, the next step is...
2. Realise financing
The financing is to cover the need. There are numerous options available to enterprises for this purpose.
- Investing the profit for further purchases.
- Raising outside capital by taking out a loan.
- Raising equity capital by selling shares in the company.
- Short-term capital needs can be met by taking out a short-term loan.
- Through the precise planning of cash flows in the company, especially short-term cash flows (keyword cash management), short-term liquidity can be ensured in the company.
3. Carry out investment
Here, target-oriented capital utilisation means that the expenditure of today means an income in the future.
In the further course, companies must constantly monitor the use of capital. If it turns out, for example, that investment is no longer profitable, there is a need for action within the company. This can ultimately lead to the release of financial resources, for example through the sale of an investment.
Which areas belong to corporate finance?
In practice, corporate finance can be divided into several decision areas, which can have either a short-term or a long-term decision horizon.
These are the main areas of activity:
1. Decisions on capital investments
Management has two options for dealing with surplus cash. It can invest long-term in the capital structure, in projects (e.g. research and development) or fixed assets. The goal is always to maximise the value of the company.
If there is no possibility to invest free liquidity in capital assets or to contribute it to the capital structure, it should be distributed to the shareholders. Capital investment decisions in the field of corporate finance thus include not only investment and financing decisions but also the dividend policy.
2. Decisions on investments
By nature, only limited resources are available in the company. Often, business areas and projects compete for budgets. An important task of corporate finance is therefore to make reliable investment decisions.
As a rule, projects with the highest return on investment are implemented first. Other valuation methods are the break-even analysis, the net present value method, the equivalent-annual-cost (EAC) method and the so-called internal rate of return.
The problem with purely monetary valuation methods is that "soft" factors are not included in the consideration. For example, research and development projects can open up completely new opportunities for a company, which of course cannot be disregarded.
More flexible tools are therefore used that also assess aspects of this kind. Here, several possible developments are "simulated" or variables are inserted into the calculation
3. Financing decisions
The return on an investment is always influenced by whether it is financed by equity, debt or a mix of both. Corporate finance has the task here of finding the ideal financing mix.
Numerous factors must be taken into account when choosing suitable corporate financing.
The framework is provided by the so-called capital structure policy. It determines the ratio of equity to debt capital in the long term. On this basis, additional capital requirements are then covered either through equity or debt financing (cf. section "Determining the appropriate type of financing").
Furthermore, corporate finance has the task of planning the raising of capital as precisely as possible in terms of amount and date so that the expenses for investments are always covered.
4. Decisions on distributions (dividends)
If no opportunities exist for investments with a positive ROI, excess liquidity must be distributed to investors.
The dividend also depends on the expectations of the shareholders. In the case of growing companies (so-called growth stocks), for example, it is expected that free cash in the company will be used for self-financed growth, which also increases the share value.
Another reason for retaining surpluses can be future investment opportunities (e.g. company takeovers, mergers & acquisitions). Professional advice is often sought here. As an aside, too much cash increases the risk of a third-party takeover attempt.
Financial management must therefore ensure an adequate cash balance.
5. Short-term financial planning (working capital management)
Having dealt with strategic and long-term decisions in corporate finance, we now look at operational, short-term financial planning. This is also called working capital management. The primary goal is to ensure that sufficient cash is available at all times to cover current expenses and upcoming liabilities.
By definition, short-term financial management deals with decisions that affect the next twelve months at most. The focus is on optimising payment flows and returns in the next planning periods.
GM Tax corporate finance advice
Our corporate finance team is made up of experts with many years of experience who respond individually to your needs. We advise you on all transaction and financing issues (financial management, capital structure).
We support you in the realisation of your corporate goals in both national and cross-border projects. We claim to guarantee you the highest quality of support and advice.
Would you like advice on our Corporate Finance Advisory? Contact our financial advisors in Barcelona by telephone or email.