Corporate finance: features, principles. Corporate finance is

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:45

Corporate finance is a special type of economic relations: a set of relations is formed in the conditions of formation, redirection and targeted use of the money supply, which arises as a natural result of the production and sale of goods or the provision of services.

Being an important link in the whole system, they:

• play the role of a foundation for building a source of income that can subsidize the state budget;
• are the "zero point of coordinates" when creating the gross national product;
• setting the stage for the coming scientific and technological revolution.

There is no doubt that corporate finance, in addition to all of the above, also performs the function of a donor - it is with their help that the "purse" of households is filled (in fact, the population is sponsored by increasing the number of vacancies).

Solving specific problems

Economic relations at the level of corporations resemble the work of a complex mechanism - the breakdown of onea single part can cause the entire unit to stop. To prevent such a scenario, among other things, it is necessary to solve two problems. Namely, to correctly distribute cash flows and control their development by the subjects.

To be specific, corporate finance (this rule is relevant for any type of inter-farm and inter-industry relations) should:

• structure the working capital in such a way that neither at the manufacturing stage nor at the consumption stage there are downtimes caused by a lack of funds or a shortage of consumables for her led to a delay in wages and a slowdown in modernization);
• not only monitor the chain of "formation, distribution and use of money", but also monitor compliance with the Labor Code, closely deal with the problem of optimizing available capacities, etc.

Guidelines

Corporation is an organization that enjoys the rights of a legal entity. Its strength and power lies in the pooling of many equity capitals managed by a small group of people.

In terms of financial freedoms and responsibilities, corporate finance is:

• complete independence, expressed in covering current expenses, as on the basisshort-term business plans and long-term strategies;
• open access to own working reserve;
• 100% payback (including and taking into account modernization);
• possibility of attracting a bank loan;
• responsibility for miscalculations and failures;
• building relations with the state (i.e. control of revenues and contributions to the budget, analysis of overall indicators, etc.).

Peculiarities of corporate finance: is it always justified to bet on large-scale activities?

The availability of production assets is one of the main conditions for the emergence of financial relations. However, despite the fact that the share of economic turnover of corporations has long ago exceeded 80%, today there are less than seven dozen organizations on the international market that are conducting truly large-scale activities. The lion's share of subjects of legal law are enterprises of modest size.

So corporate finance is, first of all, the separation of ownership from management (with the mandatory centralization of capital in the hands of directors), and not at all an exorbitant concentration of capacities. In addition, you need to understand that the division of powers between management and owners de facto ensures the stability of the economic and production structure.

Nuances of interaction

An economic model based on corporate finance is not at all the merit of a single country. Yes, the United States in some sense served as a benchmark, but globalization has erased the boundaries, and now joint-stockthe society and its founders may well be on opposite sides of the Atlantic…

Over the past 20-30 years, relations between the participants have not undergone significant changes: as before, there are two large, but not equal groups that are integrated into the corporate body and cannot exist without each other. Their composition is given below:

• management and major shareholders;
• “minority shareholders”, as well as owners of other securities, business partners, lenders and local (federal) authorities.

Economic integration provides for the development of one of three scenarios:

1. Vertical merger, that is, the union of several companies involved in the production of a particular product (the role of "product" is sometimes assigned to a service). After the conclusion of the union, all stages of manufacturing / providing something follow each other within the framework of the functionality of one organization.

2. Horizontal combination - financial relations are established between enterprises of the same type in order to increase market share and increase capacity.

3. Conglomerate "commonwe alth" - various technological lines are poured into the corporation. The goal is to expand the range in order to meet demand and ensure higher stability of cash flows.

Basic revenue accounting rules

Sales volume is a certain amount of funds or other benefits accumulated over a specific period of time: month, quarter,half a year and so on (meaning the "materialization" of the services rendered and / or income from the sale of the goods produced).

Corporate financial management is, among other things, accounting. And here are the options:

• cash method, in particular, is based on the fact that it positions the proceeds as the money supply fixed in the accounts of the enterprise at the time of the reconciliation transaction (in barter relations, material benefits from trading activities often take the form of a product);
• the accrual scheme, in turn, provides that the control of turnover is carried out after the fact, that is, the amounts are at the disposal of the company when consumers have financial obligations and are immediately identified as profit.

Accounting recognizes revenue as such provided that:

• its value can be specified;
• the right to receive is detailed in the contract;
• guaranteed growth in corporate income following the operation.

The role of transfer pricing

The principles of corporate finance underlying the formation of strong economic ties cannot be considered separately from the issue of transfer pricing. We are talking about the so-called special value of goods (raw materials, services), which is set for related institutions (organizations). Simply put, all structural branches, striving for the ultimate goal, operate with internal prices for components and other types of resources. Thus, the problem of increasing the profits of both departments and the entire enterprise as a whole is solved.

Transfer pricing information falls under the definition of "trade secret" as it effectively establishes a "competitive margin" level for the final product to be released.

Why is liquidity analysis so important?

As noted earlier, a competent organization of corporate finance implies a timely “diagnosis” of existing reports. Liquidity analysis is one of the mechanisms for visualizing the “degree of viability” of a structure engaged in trading and / or production and economic activities. It gives an idea of the potential of the enterprise in terms of short-term obligations: whether or not the corporation, by realizing the assets available to it, will be able to fulfill the promises made to partners (creditors, customers).

For preliminary analysis, a special coverage table and calculation formulas for current, quick and absolute liquidity ratios are used. But a complete diagnosis requires taking into account a large number of indicators and should be carried out by highly professional personnel.

Financial sustainability

The corporate finance system needs regular monitoring. Even short-term interruptions in the flow of working capital pose a threat to a well-established scheme of work (especially if there are no duplicating structural units in the production chain).

From a financial point of view, the stability of an organization corresponds to the level of its independence fromsources of "replenishment of the treasury". As you know, there are two of them: own capital and attracted investments. The structure of assets and liabilities is determined either by calculating coefficients (autonomy, agility of funds, etc.) or by tabular comparison. But in any case, the analysis should provide an answer to the question of the amount of financial risk.

More about external and internal sources of income

The division of working resources into external and internal is necessary due to the specifics of individual production processes. In particular, it is advisable to use the assets of an economic entity in the year-round cycle of manufacturing goods and / or providing services; it is more profitable to launch seasonal production lines by “borrowing” capacities and funds.

If the development of financial policy and its adaptation to legal realities is not accompanied by amendments to the scope of activities and the import-export direction, then, regardless of the reliability of internal and external sources of income, the risk of financial destabilization increases, and management efficiency decreases.

Is self-regulation good or bad?

The essence of corporate finance is often viewed from the position of capitalization (scale of production). However, the difference from the same sole proprietorship lies in something else - in the actual separation (legal and functional isolation) of the management apparatus from the group of founders. That is, the business activity of minority shareholders,in fact, reduced to a minimum: they only vote for members of the governing body who develop a strategy for the future and turn billions in the interests of the corporation. Since lower-level participants are limited in information, the election of directors is usually limited to supporting proposals coming from incumbent managers.

Conclusion: absolute self-regulation is a true boon for an enterprise with many structural divisions, because this mechanism allows you to avoid internal corporate bureaucracy. At the same time, there remains a high likelihood of abuse by "temporary but non-replaceable" bosses.