Capital Management Tactics in Corporate Finance

Capital is essential to carry out any sort of corporate objective. Capital can come from any source. It is mainly made up of debt and equity. Debt is generally referred to the burrowed money from financial institutes on the other hand equity is the shareholders' money known as equity capital.
Debt holders have no share in the profit but are concerned about the return of burrowed money with interest. If the debt raises the capital rise as a result of this the rate of interest rises along with risk of capital. Now let us discuss different tactics that can help in proper management of corporate finance.

Ways to Corporate Finance Management

The corporate finance should have the right mix of debt and equity which is popularly know as capital structure. But before formulating the strategy of proper finance management it is important to identify the factors on which the business risk mainly depended.
? Instable demand can increase the business risk
? Varying sale price
? Difference in input cost and skills required to control price successfully in the market
? Capital required to carry out normal functioning along with rising input cost and lower sale price
? Fall in the demand of product without fall in high fixed cost

Apart from these new cost effective production ideas, fluctuating exchange rate etc can also increase the business risk. The business risk will be higher if the fixed cost is high. Along with that higher leverage will increase the business risk. For proper management it is important to find out lowest investment on fixed asset with lowest operational cost.

Lower debt finance should be used while to avoid facing threat of bankruptcy. The use of debt finance must be based on earning in terms of present value. It is important to analyze the past and present record of the firm with accurate finance resources. The capital structure must focus on market values. With the help of an effective capital structure it is possible to maximize the market value of the firm. The credibility of the firm mainly depends on the market value. With proper capital management it is possible to use the resources effectively to yield better return on investment.

A Corporate Finance Primer

Corporate finance can be complicated. It deals with using financial tools to increase the corporate value of the company and decrease any risks associated with the company, such as credit, liquidity, and operational risks. Credit risk refers to the risk of a borrower not paying back debt. Liquidity is the ability to change an asset into cash. The quicker the asset can be converted into cash, the more liquid it is. The risk involved with liquidity is the risk that a given asset cannot be converted into cash fast enough to bring a profit, or prevent a loss. Operational risk deals with the risk inherent in a company's operations. This is a bit broader than the other types of risk. Operational risk includes fraud and other illegal practices.

When a public company makes a profit, they distribute dividends to their shareholder. Shareholders are investors in the company. Dividends are simply the portion of the company's profit that is paid out to the shareholders of that company's stock. Dividends can take a variety of forms including cash payments, stock dividends (additional shares of stock), or property dividends. Property dividends can be assets such as securities, as well as products and services. In the past, they have even involved acreage of land. Sometimes a company will re-invest the dividends in itself. This is what makes up part of the retained earnings of the company.

Occasionally, an individual or a company will want to buy another company. There are different ways to accomplish this. One way is an acquisition. The acquisition, also known as a takeover or buyout, involves the purchaser of the company buying the target company. Two types of this are MBO (Management Buyout) and MBI (Management Buy-In). MBOs occur when the management already in the company acquires a large part, or all, of the company. The opposite of this is the MBI, which happens when n individual or group of individuals from outside the company buys the company and instills themselves as the new management of the purchased company.

Another form of acquisition is known as consolidation, or the merger. A merger occurs when two similar sized companies join together to form a completely new company. A friendly merger is one in which both companies are negotiating the terms of the merger. In contrast, a hostile merger is one in which one company does not wish to join another, or the board of the company does not know prior to the offer about the merger.

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