Financial Management of Corporate Companies - Assignment Example

Managing Financial Resources Prepared by Submitted to Word count 2087 1. Introduction There will be a number of issues in the business to manage. Managing them and using judiciously will result in profitability of the business. The most important of those managements is the management of financial resources. The financial resources management involves, retail, corporate, investment, private banks, mutual funds, investment trusts, life and general insurance and reinsurance companies, credit issuers, specialist lending companies, stock exchanges, leasing companies, government savings institutions, brokers and agents. The difference in the management of financial resources is le3ss and at the same time distinct also. There is less difference in the need of the management of the financial resources and each sector is distinct in the way it requires the management of financial resources. The financial resources management will accelerate mergers and takeovers of the corporate companies. This is made possible by deregulation of financial services and their management. This enabled the companies to take the services regarding financial resources from outsiders. This means that the financial resources management also can be outsourced. The resources management will be positive and yields good results when it is above the traditional barriers. For example, the building societies in UK cannot provide home loans and savings accounts. The need of financial resources is very much less. The management of the resources gained importance when they are allowed to do this 1986. This even resulted in the societies converting into banks also. This in turn increased the financial resources of the UK society. Not only regarding the building societies, even small and medium size enterprises also started exporting to foreign countries. This demands extra financial resources and usage of them according to the situation in the foreign country, the goods to be exported. This financial resources management results in business to business financial services that manages the resources in order to increase the business. The deregulation of retail and investment resulted in emergence of new markets and new corporate entities. This situation increased the financial resources and management of them. In fact the effective financial resources management resulted in the growth of economy of European and American countries and resulted in expansion. In the UK and other European countries, the level playing field concept under single market program needs financial management. The financial resources management is also a need of the transactions that increased beyond the borders of the country. 1 2. Financial Resources The financial resources will be mainly of three types. The first one is the equity of the company and the second one is loan acquired from banks and other financial institutions. In case of corporate companies, the equity plays the main role and in the context of small companies, the loans acquired from banks or other financial can be considered as important financial resources. This difference in the importance of the resources will make the financial management of the corporate companies and the small businesses different. The third one will be the earnings incurred in every financial year. 3. Financial Management of Corporate Companies 3.1 The non linear models and their application: The non linear financial models will help in financial management of corporate companies. In these models, the fore casting of the weather also can be termed as an aspect that decides the operations execution and the financial resources usage. The financial resources in corporate management use the applications of probability and optimization theory. These tools will be useful in optimizing the results of the business activities. The financial modeling involves the total capital available and the activities in which it is used. The probability of the success of them in the past and the optimization of the usage by using the revenues judiciously will result in good financial resource management. The multifrctals are put to work at stress test and a port folio is created. In doing this the corporate financial managers create the patterns of variability. These are based on unknown rules that govern the market. The relation between the generator of the revenues and the happenings affecting it either positively or negatively are evaluated and expected. The landing of the financial sources must be secure. The financial resource management starts with investing and using them in secure place that will yield returns considerably in the near future. 2 The Corporate entities recognize that the growth of the business is as important as delivering the value for share holders. The earnings of the company should enable it to make sizable investments in production technologies of the company after paying dividend and other benefits for the company. This helps in growth of the business of any corporate company. This requires the company to estimate the future needs of the customers. Thus estimating customers’ future needs can be a foundation for the future financial resources management. In the same manner the corporate company before it was being established, should make a survey and research about the customers’ needs of their products to make a judicious financial resources management. 3.2 Long term investments: The long term investment is a part of the financial resource management. This includes a development of portfolio for any corporate company. The expectations on the portfolio will be according to the future financial and business needs of the company. This should result in major projects in the future that increases the present development. This amounts to good financial resource management if the investments in portfolio from the earning incurred every year result in increase of the production of the future needs of the customers. The portfolios that are created by investing the earnings should concentrate on the expansion of existing facilities to increase the production of the future needs as mentioned above. Another portfolio should be made in that lines as part of the long term investment. The following graph will be a result of good portfolio management and financial resource management by any company. The above graph is adopted from http://www.exxonmobil.com/Corporate/Citizenship/CCR6/financial_resource_management.asp In the above graph in the earlier years the company is paying more dividend than the share purchases for reducing the outstanding shares. In the fifth year the company’s share of share purchases is more than that of the amount paid as dividend. This can be termed as a good financial resource management as in future this results in decrease of payments of dividends and increases the financial resources of the company. The strategy of the company should be to deliver higher share holder value by managing the business efficiently. This includes the evaluation of the new investments. The company has to follow this strategy to produce strong earnings and positive cash flows. Though the reduction in the amount for the purchase of the shares results in more liquidity in the present year, the purchase of shares will have reasonable liquidity now and is capable of increasing the liquidity in future to expand the activities of the company. This results in the capacity of the company to pay for the remaining share holders more dividend than before and this enables in increasing the share value of the company in the share market. This in turn results in increase of the net worth and valuation of the company and the company mobilize the financial resources in emergency by selling reasonably small amount of shares to acquire capital resources. Though this should be done in the emergency only, it is mentioned because the good financial resource management will result in more security options for the company regarding the liquidity. The above mentioned method is capable of increasing the payments of dividends for the remaining share holders year by year. 3.3 Resource management regarding the demand effects: In case of corporate business they should take into account the international prices while investing in portfolio or the business activities along with production operations. This is because, the global commodities like oil and petroleum products are subjected to increase if the currency of the country the corporate operates decreases internationally. The company has to invest in the portfolio to have enough funds in case of such type of situation and this requires reasonable investment in acquiring other strong currencies to use in the need of above mentioned emergencies. This requires the investment of the company in the foreign currency portfolio from the earnings incurred. This may slow down the process of share purchase to reduce outstanding shares, this will help in emergencies that increase the production costs and pose threat for the profitability of the company. This requires acquisition of the natural resources that yield the raw materials the company use in the production of its products. For example, a steel company can invest in acquiring the iron ore mines and an oil company can invest in the oil fields. Similarly the case of other companies. The investment of the earnings in the natural resources that produce the raw materials for the products of the company can be termed as the modern method to manage the financial resources judiciously and is a part of the portfolio management. This method in the initial stages uses up the earnings incurred but in the future will result in the increase of assets that decrease the production costs in an increasing atmosphere of increasing costs of raw materials. This results in global supply of the companies’ products as the company will increase presence in other countries by its portfolio management as a part of financial resource management. For this type of resource management the company should have estimates for the future rise in prices. The rise in costs for the company to produce its goods should be lesser than the rise in costs for the production of the same product by another company. 3 4. Financial Resource Management for Small Businesses In case of small business the future investment should be less and the present analysis is required for financial resource management. The majority of the small businesses go bankrupt within 10 years of their starting of the business due to lack of financial resource management. This is due to imbalance in the financial needs and the financial resources and this lack or imbalance can be termed as a result of non judicious use of financial resources available for the small business. The company should continuously looking at profit figures and should estimate whether they are in line with the percentage that is estimated at the beginning. This requires to estimate a profit percentage for the business and sales activities of the company. As small businesses have to pay higher interests on loans, the interest paid will decrease the net profit of the company at the end of the year. As a result the company should concentrate on using the earnings to clear loans and to increase assets that help in future investment. For example, a retail business can invest the earnings in real estate as those assets will help the company to develop new counters in the future according to the need. As small businesses cannot carry business activities with lesser profits, the management should see that the products that incur more profits can be sold in a larger volume than the products that incur lesser profit. The products that incur lesser profit cannot be left out a they attract the customers who buy the products that incur more profits. 4 The important reason for the fail of online and offline business that employ above methods is about overestimating the money that is needed to spend. The spending of the money within the limits of the needed amount can be termed as financial resource management. The things should be organized to know the outflow and inflow of the cash. This helps the business in reducing the unnecessary costs. This needs the organization of the files and book work separated. The cluttered files may lead the business into the debt. In the present age this maintenance of the files and accounts can be done with the help of the computers. This organization of the financial activities will generate maximum amount of the profit possible to the company. Another thing in the financial resource management for the small company is hiring of the employees. The number of the employees if more than required will incur high costs and reduces the profits. The less number of employees result in losing of the business. The right mix of the number of employees and the4 reasonable salary will make the company to operate the business with profits. To get exemption of the taxes, the company can take the services of a auditing company that can make reasonable exemption in paying the taxes. 5 References: 1. Cheverton, Peter. Key Account Management in Financial Services. London, , GBR: Kogan Page, Limited, 2004. p 4. http://site.ebrary.com/lib/nulibraries/Doc?id=10074927&ppg=21 2 Henderson, Bruce. Scientific Financial Management : Advances in Financial Intelligence Capabilities for Corporate Valuation and Risk Assessment. Saranac Lake, NY, USA: AMACOM000. p 19. http://site.ebrary.com/lib/nulibraries/Doc?id=10005792&ppg=33 3. Exxon Mobil, 2007, financial resource management, Exxon Mobil, ,electronic, 21-07-07, http://www.exxonmobil.com/Corporate/Citizenship/CCR6/financial_resource_management.asp 4. Brian Li, 2003, The Secret Success Principle For Small Businesses Everywhere, ICBS, ,electronic, 21-07-07, http://www.icbs.com/KB/finance/kb_the-secret-success-principle-for-small-businesses.htm 5. curtis Stevens, 2007, How to manage your money, ICBS, ,electronic, 21-07-07, http://www.icbs.com/KB/finance/kb_how-to-manage-your-money.htm Read More