Corporate finance

Main article: Corporate finance

Managerial or corporate finance is the task of providing the funds for a corporation's activities. For small business, this is referred to as SME finance. It generally involves balancing risk and profitability, while attempting to maximize an entity's wealth and the value of its stock.

Long term funds are provided by ownership equity and long-term credit, often in the form of bonds. The balance between these forms the company's capital structure. Short-term funding or working capital is mostly provided by banks extending a line of credit.

Another business decision concerning finance is investment, or fund management. An investment is an acquisition of an asset in the hope that it will maintain or increase its value. In investment management – in choosing a portfolio – one has to decide what, how much and when to invest. To do this, a company must:

* Identify relevant objectives and constraints: institution or individual goals, time horizon, risk aversion and tax considerations;
* Identify the appropriate strategy: active v. passive – hedging strategy
* Measure the portfolio performance

Financial management is duplicate with the financial function of the Accounting profession. However, financial accounting is more concerned with the reporting of historical financial information, while the financial decision is directed toward the future of the firm.

[edit] Capital

Main article: Financial capital

Capital, in the financial sense, is the money that gives the business the power to buy goods to be used in the production of other goods or the offering of a service.

[edit] The desirability of budgeting

Budget is a document which documents the Plan of the business, This may include the objective of business, Targets set, and results in financial terms, e.g. The target set for sale, resulting cost, growth, required investment to achieve the planned sales, and financing source for the investment. Also Budget may be long term or short term. Long Term have a time horizon of 5-10 years giving a vision to the company, short term is an annual budget which is drawn to control and operate in that particular year.

[edit] Capital budget

This concerns fixed asset requirements for the next five years and how these will be financed.

[edit] Cash budget

Working capital requirements of a business should be monitored at all times to ensure that there are sufficient funds available to meet short-term expenses.

The cash budget is basically a detailed plan that shows all expected sources and uses of cash. The cash budget has the following six main sections:

1. Beginning Cash Balance - contains the last period's closing cash balance.

2. Cash collections - includes all expected cash receipts (all sources of cash for the period considered, mainly sales)

3. Cash disbursements - lists all planned cash outflows for the period, excluding interest payments on short-term loans, which appear in the financing section. All expenses that do not affect cash flow are excluded from this list (e.g. depreciation, amortisation, etc)

4. Cash excess or deficiency - a function of the cash needs and cash available. Cash needs are determined by the total cash disbursements plus the minimum cash balance required by company policy. If total cash available is less than cash needs, a deficiency exists.

5. Financing - discloses the planned borrowings and repayments, including interest.

6. Ending Cash balance - simply reveals the planned ending cash balance.

[edit] Management of current assets

[edit] Credit policy

Credit gives the customer the opportunity to buy goods and services, and pay for them at a later date.

[edit] Advantages of credit trade

* Usually results in more customers than cash trade.
* Can charge more for goods to cover the risk of bad debt.
* Gain goodwill and loyalty of customers.
* People can buy goods and pay for them at a later date.
* Farmers can buy seeds and implements, and pay for them only after the harvest.
* Stimulates agricultural and industrial production and commerce.
* Can be used as a promotional tool.
* Increase the sales.

[edit] Disadvantages of credit trade

* Risk of bad debt.
* High administration expenses.
* People can buy more than they can afford.
* More working capital needed.
* Risk of Bankruptcy.

[edit] Forms of credit

* Suppliers credit:
* Credit on ordinary open account
* Installment sales
* Bills of exchange
* Credit cards
* Contractor's credit
* Factoring of debtors
* Cash credit

[edit] Factors which influence credit conditions

* Nature of the business's activities
* Financial position
* Product durability
* Length of production process
* Competition and competitors' credit conditions
* Country's economic position
* Conditions at financial institutions
* Discount for early payment
* Debtor's type of business and financial position

[edit] Credit collection

[edit] Overdue accounts

* Attach a notice of overdue account to statement.
* Send a letter asking for settlement of debt.
* Send a second or third letter if first is ineffectual.
* Threaten legal action.

[edit] Effective credit control

* Increases sales
* Reduces bad debts
* Increases profits
* Builds customer loyalty

[edit] Sources of information on creditworthiness

* Business references
* Bank references
* Credit agencies
* Chambers of commerce
* Employers
* Credit application forms

[edit] Duties of the credit department

* Legal action
* Taking necessary steps to ensure settlement of account
* Knowing the credit policy and procedures for credit control
* Setting credit limits
* Ensuring that statements of account are sent out
* Ensuring that thorough checks are carried out on credit customers
* Keeping records of all amounts owing
* Ensuring that debts are settled promptly
* Timely reporting to the upper level of management for better management.

[edit] Stock

Purpose of stock control

* Ensures that enough stock is on hand to satisfy demand.
* Protects and monitors theft.
* Safeguards against having to stockpile.
* Allows for control over selling and cost price.

Stockpiling
Main article: Cornering the market

This refers to the purchase of stock at the right time, at the right price and in the right quantities.

There are several advantages to the stockpiling, the following are some of the examples:

* Losses due to price fluctuations and stock loss kept to a minimum
* Ensures that goods reach customers timeously; better service
* Saves space and storage cost
* Investment of working capital kept to minimum
* No loss in production due to delays

There are several disadvantages to the stockpiling, the following are some of the examples:

* Obsolescence
* Danger of fire and theft
* Initial working capital investment is very large
* Losses due to price fluctuation

Rate of stock turnover

This refers to the number of times per year that the average level of stock is sold. It may be worked out by dividing the cost price of goods sold by the cost price of the average stock level.

Determining optimum stock levels

* Maximum stock level refers to the maximum stock level that may be maintained to ensure cost effectiveness.
* Minimum stock level refers to the point below which the stock level may not go.
* Standard order refers to the amount of stock generally ordered.
* Order level refers to the stock level which calls for an order to be made.

[edit] Cash

[edit] Reasons for keeping cash

* Cash is usually referred to as the "king" in finance, as it is the most liquid asset.
* The transaction motive refers to the money kept available to pay expenses.
* The precautionary motive refers to the money kept aside for unforeseen expenses.
* The speculative motive refers to the money kept aside to take advantage of suddenly arising opportunities.

[edit] Advantages of sufficient cash

* Current liabilities may be catered for.
* Cash discounts are given for cash payments.
* Production is kept moving.
* Surplus cash may be invested on a short-term basis.
* The business is able to pay its accounts timeously, allowing for easily-obtained credit.
* Liquidity