09 August 2021
Strong financial understanding is a prerequisite for an organisation’s leadership team. Corporate financing is a broad term. In brief, it’s the division of finance that covers how companies approach different funding sources, investment decisions and their overall capital structure.
The aim is to maximise shareholder value by utilising both short and long term financial planning. It also covers the creation, implementation and monitoring of strategies to help achieve the company objectives.
Understanding corporate financing is a crucial part of the job description for the CEO. While it may be possible through clever delegation for a CEO to overcome a lack of knowledge of corporate finance, it’s advantageous for an organisation if the CEO has a strong financial compass.
Leadership teams who understand corporate financing can better resist temptations such as unwise financial engineering, overdone leverage and an absence of caution during times of economic growth. It’s easy for misconceptions and miscalculations to create presently unforeseen difficulties.
So, what is corporate finance?
While corporate financing is a complex topic, a few fundamental principles can help you broach the subject.
This principle states that the creation of value is a function of returns on capital and growth. At its most simple, you need to generate returns if your company is to be viable. With no value creation, short or long term financial planning is largely irrelevant.
Without the ability of your business to generate value, while recognising that value isn’t always financial, the long term prospects for that business will be challenging.
When it comes to understanding corporate financing, value creation is everything. Following close behind is how that value is both used and conserved. Short term financing options may be attractive, but they might not offer much in the long term.
The ‘Conservation of Value Principle’ recognises that you can’t create value by rearranging claims on cash flows. Rather than looking at how the pie is sliced with complex financial engineering, a clear focus needs to be placed on improving cash flows.
The changes in a company’s share price reflect the changes taking place in expectations about its performance rather than the details of its actual performance. While these may be connected, they can sometimes be at variance.
When considering corporate financing, a company’s leadership team needs to focus on the hard facts about its performance rather than the share price. The expectations treadmill also creates pressure for the company to deliver. The higher those expectations, the better the company needs to perform just to keep up. Balancing realism with expectation and ambition is a vital part of intelligent corporate financing.
No business has an overall inherent value. The value of a business depends on the priorities, strategies and approach of the owner or prospective owners. This essentially means that a new owner cannot expect to take on a business that has delivered a certain level of growth, change how that business operates, and then expect growth levels to continue at the same rate.
Global Investment Strategy takes an integrated approach to corporate financing and, over the years, we have become the trusted corporate finance advisor for a diverse and growing list of clients.Call +44 (0)20 7048 9400 or email firstname.lastname@example.org to learn more about our bespoke services.