Corporate finance is a term used widely, but do people truly understand it? For running a business, it is essential to understand what corporate finance truly is. If you are starting a new business, is the business idea and skills required to undertake projects all you need? No, there’s more.
You have to devise a system for managing the money. Whether you’re a small business owner or a large one, you need to monitor economic activity because this is one area you cannot afford to mismanage. Seeking professional help for corporate finance is thus extremely important for sustaining as a business
This article aims to help you understand the basic concepts of corporate finance, which also highlight the need for hiring a professional.
Concepts of Corporate Finance for every business owner
Every business decision has financial implications, and every decision that you make pertaining to the use of money can be called a corporate finance decision. Corporate finance has some principles of investment, financing, and dividends. In order to fulfill these principles in your operations and decision, you need to understand the following corporate finance concepts:
1. Capital Budgeting
You need to plan al the expenditures relevant to your business. Especially, the fixed assets that are called capital because of their long-term nature. The process of planning this capital to measure the cash flow expectations is called capital budgeting.
There are two approaches in front of you to choose amongst while going for capital budgeting. The first approach is called Net Present Value. In this approach, you have to discount the entire set of cash flows, including the outflows and inflows, at the capital’s cost for a given project. The second approach is called the internal rate of Return, which is basically a discount rate that helps you take the NPV of a project to Zero.
2. Time value of Money (TVM)
If you own 100 dollars today, the cash amount will be worth much more after a few years—the value of money increases or decreases with time. The concept is called the Time value of money in the field of corporate finance. There are several kinds of payments which are guided by the TVM.
These payments are called annuity and perpetuity. An annuity is a set of payments that you regularly make in order to compensate for the time value of money. Similarly, perpetuity is an annuity that has an infinite count of cash flows. Thus perpetuity never ends.
3. Cost of Capital
Capital is the prime unit in the corporate world, without which no business can run. It is a factor of production and has some cost or value attached to it. You need to be realistic to understand the cost of capital and seek professional help from bookkeeping and accounting firms in Dubai to make accurate calculations and extract useful information.
This extracted information is essential for developing insights and making important business projections. You have to ensure that all the sources that lend you money receive timely returns.
4. Working capital management
A firm’s short term liabilities and its short term assets have a very important relationship that falls under working capital management. This practice of management helps your firm continue the daily operations and satisfy the needs of stakeholders and partners.
Your firm’s ability to satisfy the liabilities like short term debt and operational expenses is highly dependent on working capital management. This management includes but is not limited to matters of accounts payable and receivable, inventories, and cash.
5. Measures of Leverage
The amount of fixed costs that your firm possesses is referred to as leverage. These include operating expenses and financing costs, such as debt interest payments. When your firms have a greater level of leverage in terms of fixed costs of leases, equipment, or interest payments, there is greater variability in the after-tax earnings of the firm as well as the net income from a project.
To use these leverage in the best way possible, seek professional help from an outsourced company for bookkeeping and accounting and enhance the variability of fixed costs. This area is very important to understand in order to excel in finances.
Are you starting your own business? Understand corporate finance first!
People run businesses to make money, and managing this money well is primarily important. Hire corporate finance and accounting professionals from an independent company. In this way, they will be accountable to you, and they will perform their job with the utmost impartiality.
Developing an understanding of the concepts elaborated above is essential because these make you realize the importance of hiring a professional for the job of accounting and financial management. They can even help you with stocks, investments, and attaching value to other companies in the market. They also suggest internal changes and measures which suit your business goals and can trigger success.