business finance advice

business finance advice

Maximizing Business Finance: Practical Strategies for Success

1. Introduction to Business Finance

In the UK, the most widespread sources of finance are as follows: term debt from financial institutions, leasing, equity finance through public issues or “business angel” investment, and debt through capital markets. For an increasing number of businesses, retained earnings have become the vehicle of growth. The source will be related to different business sectors, stages of maturity, and size. The availability of finance varies between these parameters and over time. There have been considerable changes in the finance-raising process. These result from changes in the tax system, inflation, the structure of the corporate and banking sectors, and the increased participation in stock markets as investors and issuers.

One of the most critical issues regarding the success of a business enterprise is finance. James Van Horne, in “Financial Management and Policy,” remarks: “It is to a corporation what blood is to a man. Thus, it is not difficult to see why the problem of corporate finance is the key to the financial management process. Corporate finance has to do with the question: How should a corporation raise money in the first place? Furthermore, it is concerned with how these funds should be applied, and it involves several decisions – the investment (or asset allocation) decision, the financing (or capital structure) decision, and usually the dividend decision.”

2. Financial Planning and Budgeting

It is also important to remember that there are “opportunity costs” to holding money in reserve for potential future distributions. As financing needs develop, the senior manager can finance them with cash reserves set aside from prior periods and with current cash flows. It is important, in any event, to remain financially flexible. During a period of rapidly increasing gallonage sales, it may be tempting to forgo a distribution to shareholders in order to accumulate funds for the construction of additional facilities. This “strategic retainer” budgeting policy is discussed further in the section on dividend policy. However, a positive consideration is exerted by maintaining a consistent policy towards the distribution of funds. Periodically being forced to reduce distributions leads to considerable difficulties with investors, particularly when expansion plans are involved.

To maintain a successful business over the long term, business managers must be able to allocate available resources in a manner that is consistent with the established strategy of the company. This process of resource allocation is referred to as the budgeting function. Many investment projects can be analyzed on a strictly quantitative basis. The costs of the resources required for the project and the expected income flows from the project can be assessed with some degree of confidence. However, there are many non-quantitative benefits from projects that are important to the corporation and must be considered in the resource allocation process. These non-quantitative corporate goals, or strategic objectives, must be formulated, and resource allocation procedures must take these objectives into consideration.

Introduction to the concept of budgeting

3. Optimizing Cash Flow Management

There is no substitute for good and reliable reporting and internal control systems required for effective cash management. Thus, procedures must be put in place for identifying a balance surplus or a shortage, and for supporting operational review and planning activities. Small businesses may require the same detailed evidence and accountability reports as do larger companies. As an example, a graduate student opened a small catering business in her community. She prominently displayed on her office wall a large daily profit and loss statement that was separately computed for each activity (“job”) or party, which made each job her operating responsibility. At the end of the job, she would compare the actual results with the budget and determine the cause of any variance. This practice quickly recognized and corrected a worsening benefit-neglect technique of employees who did not attempt to cooperate to speed up the initial setup. Only days of unloading time were recorded for the job.

The financial success of a business depends largely on proper cash management—effectively ensuring that its cash inflows exceed its outflows. However, many organizations, including companies and nonprofit entities, fail to maximize their internal resources to ensure a healthy and competitive cash management policy. In this regard, external financing is not as efficient as a business’s own capital. As an example, most businesses can extend their days of working capital by paying suppliers later, which delays cash outflows. Similarly, a business could realize a higher return on its excess cash by redeeming its own securities and thereby reducing the cash balance, while the remainder of its assets and liabilities remain unchanged.

3. Optimizing cash flow management

Practical strategies for success

4. Investment and Financing Strategies

The necessary investment in products, markets, and capital assets is substantial and continues to grow as the business itself grows and changes. When contemplating investment that presumably generates revenue which is large enough to capitalize on these opportunities, business managers have a lot of flexibility when it comes to the critical question: “How do we finance these investments?” and “How would such investments be viewed from the capital markets’ perspective?” The focus of this chapter is an overview of some practical strategies and state-of-the-art methods business managers can use to transition from the confident response to the first question to a desired positive answer to the second. These strategic finance investment business approaches were previously added to the business management toolkit and refined in the quest for maximizing the economy’s use of capital.

Businesses are born, grow, change, decline, and die. To survive, not to mention thrive, the flow of funds through a business needs to be carefully managed. Whether the enterprise is a private firm or a large public corporation, success implies fresh investment in products, markets, and capital assets that can be financed profitably. Exactly how that investment and financing combination comes together is dependent upon a variety of business, economic, capital market, and managerial factors. Business managers do have a lot of flexibility when it comes to managing the investment and finance relationship. This chapter provides an introductory view of the strategic financial management and state-of-the-art finance investment decision-making and some broad guidelines with detailed examples when it comes to blending investment and financing decisions.

5. Risk Management and Contingency Planning

Rather than deny the potential that some negative forces could materialize, companies need to find strategies that minimize the risk of the downside happening in an unacceptable form. A great deal of attention needs to be paid to what contingency plans can be made to ameliorate the risks of worst-case scenarios. There is no sensible reason for operating on the edge of disaster, rather than backing the markets closer to the competitive strengths of the business. The hard-nosed business leader is fully aware of the risks they are running, but it is essential that the risks are rationalized. Such an approach requires a dispassionate appreciation of the impacts of the outside world on the business.

While most people are uncomfortable living with fear, leadership is a constant struggle to avert our worst fears without appearing to be afraid. The personal dynamics of an organization make it unlikely that everyone can be convinced to believe in its potential in any single future. The decision-making challenge is to choose an option that appeals to the majority of key participants. Identify and reduce the risks – Sometimes it is feasible to convert all large business decisions into a low-risk decision by going at a pace to which everybody can adapt. However, this can be too slow to allow endangered companies to turn around. Hence, there are often binding, irreversible commitments. These inevitably force the organization into the forefront of business risk management.