business finance planner

business finance planner

Maximizing Business Finance: A Comprehensive Guide for Strategic Planning

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1. Introduction to Business Finance Planning

Poor financial management can also result in increased bankruptcy, reduced credit ratings, or higher interest rates. Inefficient financial planning, recommendations should result in improved outcomes and profitability, enhanced market positioning, advantageous cost structures, and optimized processes and operations. Financial structure and investor control requirements vary markedly with the context and segment in which businesses operate. Preliminary use of advising facilities provides strategic planning and decision-making input. These principles help business owners optimize their company as they work through its various stages of new ventures, financing, capital investments, and strategic planning.

When you start a company, one key goal of strategic planning is maximizing financial performance while minimizing financial risk. Business finance is the art and science of managing your company’s money so that it can maintain a healthy business and generate more money in the future. The key to business finance is to set your company’s goals and then systematically evaluate how the company will accomplish these goals. A business owner needs to clearly define their business finances. The goal of business finance is to maximize the organization’s capacity to add wealth, to drive economic value.

2. Financial Analysis and Forecasting

To estimate both future profits and to ensure timely payment to creditors, business managers need to utilize their own effective and accurate financial analysis and forecasting tools. The following techniques are used by successful business managers throughout the world. They are vital and indispensable, same as any kind of medical diagnosis. Would any of us willingly allow a misdiagnosis if we were ill? The answer is a resounding “No.” Thus, to increase the likelihood of the overall success of your business, utilize the following analytical and forecasting tools.

Profit has always been and will always be the main concern of every business. If, in the long run, a business can generate profits, it has the potential of providing a solid return of capital to the investors who risked their capital. It also can provide opportunity for continued employment and advancement to the people working within the business. However, in the short run, it is possible for a business to have very large profits or losses. Because creditors often require a firm to have excellent contemporaneous profits, extraordinarily large or continuing losses could cause them to be less willing to allow the business the potential to generate long-run profits.

Chapter 2: Financial Analysis and Forecasting

3. Capital Budgeting and Investment Decisions

According to one survey, based on the experience of 178 companies, the average company uses a capital budgeting decision process which takes 2.8 months. Half of the companies making larger investments spend 3.0 months arriving at their decisions. The leading factor in the time and complexity involved in the process is apparently the need to analyze new and conflicting information. Also contributing to the complexity of the process is the concern over the lack of adequate evidence to support the investment prices and the difficulty in judging investment proposals which show different rates of returns. More than seven proposed investments were examined on the basis of 18 different forecasts and 6 different predicted investment returns. Even more investment proposals were judged on the basis of unreadiness about the future. Finance managers seem to have little difficulty in separating the boys from the men, since few investment capital is turned down or critically altered after this detailed examination.

The capital budgeting process refers to the long-term planning for proposed outlays on projects whose returns are expected to be received over several years. The funds invested in these projects are long-term commitments, and it is important for management to consider carefully the risks and returns of the various investment opportunities open to the company. A comprehensive approach to the problem of capital budgeting is essential, rather than attempting to make decisions in a less systematic manner.

4. Risk Management and Hedging Strategies

Some of the exposure problems raised by operations in the foreign exchange markets are: translation exposure, which arises from determining the dollar equivalents of separate operations located in distinct countries; and economic exposure, which stems from future monetary changes to cash flow from operations occurring in distinct countries with separate currencies. This exposure has also been labeled as the “real exchange exposure” and “operating exposure.” Most corporate treasurers try to identify some of their net assets or liabilities that are denominated in foreign currencies. These assets are usually represented by long-term assets or by long-term liabilities, for these values may be affected by exchange rate changes. Also, generally known are the receivable and payable ratios.

In the context of international commerce, foreign exchange risk management has become a strategy of significant importance when conducting business due to fluctuating rates between different countries’ currencies. An understanding of these potential changes is particularly critical from the standpoint of a firm’s exchange rate exposure and any subsequent effects that fluctuating rates may have on the firm’s worldwide cash flows. Effectuating an appropriate risk-management program minimizes the impact of such distortions. Thus, the involvement of many corporations in exchange rate risk management is of concern to both corporate managers and financial economists.

5. Financial Performance Evaluation and Reporting

The relation between measurable calculations in the capital budgeting process and optimal decision rules is the principal focus of this analysis, as well as the impact motivations on these calculational procedures. The literature is replete with ad hoc solutions to the problem of sensitivity analysis in capital budgeting decisions. There are, for example, any financial consultant reports and advertised programmable calculator packages that purport to offer standard techniques for carrying out sensitivity analysis. The haphazardness with which most of these procedures are used is deplorable. Such ad hoc procedures usually fail to provide decision makers with an ordered set of sensitivity solutions.

The tools for planning the sophisticated investment program are reviewed. The first principles of taking investment projects are related, especially the setting of internal allowable rates of return. The impact of risk on investment decision making is also covered. A separate section is devoted to investment decisions under certainty, which are approached from the angle of modern asset theory. In a separate section, we then show how alternative investment rules may be used for project selection. The various forms of cost saving in investment programming are then reviewed. The use of discounted cash flow techniques for comparing alternative investment projects has been dealt with in an earlier work by the author – Capital Budgeting and Investment Behavior – and will not be covered in this text. The remainder of this work will be devoted to a discussion of the critical areas of project appraisal that one has to deal with when confronted with the uncertainty which characterizes most decisions in the real world.

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