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CORPORATE FINANCIAL POLICY

MFSM SEM II Prof. Subhash Dalvi

What is Corporate
Pertaining to corporations. Corporations are the most common form of business organization, and one which is chartered by a state and given many legal rights as an entity separate from its owners. This form of business is characterized by the limited liability of its owners, the issuance of shares of easily transferable stock, and existence as a going concern. The process of becoming a corporation, called incorporation, gives the company separate legal standing from its owners and protects those owners from being personally liable in the event that the company is sued (a condition known as limited liability). Incorporation also provides companies with a more flexible way to manage their ownership structure. In addition, there are different tax implications for corporations, although these can be both advantageous and disadvantageous. In these respects, corporations differ from sole proprietorships and limited partnership.

CORPORATE FINANCE
Corporate finance is the area of finance dealing with monetary decisions that business enterprises make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximize shareholder value. Although it is in principle different from managerial finance which studies the financial decisions of all firms, rather than corporations alone, the main concepts in the study of corporate finance are applicable to the financial problems of all kinds of firms. The discipline can be divided into long-term and short-term decisions and techniques. Capital investment decisions are long-term choices about which projects receive investment, whether to finance that investment with equity or debt, and when or whether to pay dividends to shareholders. On the other hand, short term decisions deal with the short-term balance of current assets and current liabilities; the focus here is on managing cash, inventories, and short-term borrowing and lending.

FINANCIAL POLICIES RELATING TO


Capital Budgeting / Project Appraisal (Economic, Technical & Financial feasibility studies, Risk evaluation & sensitivity analysis, Measurement of cost of capital & determining minimum rate of return for project decisions, Financial control & follow-up of projects evaluated under DCF Techniques) Disinvestment as a Financial Strategy (Opportunities of disinvestment, Factors Influencing, Financial Analysis etc) Expansion & Diversification Strategies (Market, Customer, Product, Process, Developing conglomerates & Subsidiaries, Financial, Tax & Govt. Policies governing such decisions, Mergers & Amalgamations, Issue of Bonus Shares & their financial implications)

Role of Debt Financing in Indian Environment


Corporate Planning & Break-Even Analysis (With multiple constraints like shortage of power & materials, Customer & Market Constraint, Export obligation, price control, production mix etc.) Basic concept in International Financial Management (Various aspects concerning foreign exchange transactions, International financial markets & Institutions, Euro Dollars Market, Petro-Dollars Market) Working Capital Management

WORKING CAPITAL MANAGEMENT


MMS - Sem II Prof. Subhash Dalvi

Introduction
Fixed Capital Required for procurement of fixed assets viz land, machinery, building, plant etc. Working Capital Required for financing day to day activities Working capital is warm blood passing through the arteries and veins of the business and sets it ticking. Liquidity & profitability are important in business. Liquidity depends on the profitability of the business activities and profitability is hard to achieve without sufficient liquid resources.

Definitions
Excess of Current Assets over Current Liabilities It is that capital which is not fixed Circulating capital means current assets of a company that are changed in the ordinary course of business from one form to another. E.g. from cash to inventories, inventories to receivables & from receivables to cash Amount of funds necessary to cover the cost of operating the enterprise

CA & CL are assets & liabilities which arise in the course of normal operations of an enterprise. These assets change form and are used to pay off current liabilities. This changing of assets due to and in course of operations is known as Working Cycle or Operating Cycle. The assets & liabilities thus, arising can be said to be CA & CL and the difference between the two as Working Capital

FACTORS DETERMINING WORKING CAPITAL REQUIREMENT


Nature of Business Public utilities requires less working capital as they sell on cash basis. Trading business requires proportionately larger WC as it has to carry certain inventories & allow credit to its customers. Manufacturing concern requires huge working capital as compared to trading firm. However the requirement of WC varies from industry to industry and from time to time in the same industry Production Policies Level of production Production Process Long process more WC & vice versa Size of Business Unit Larger the size more the WC & vice versa

Purchase & Sales Terms Credit purchase & Cash sales would require less capital & Cash purchase & Credit sales would require more WC Inventory Turnover Low inventory turnover more WC & vice versa Seasonal variations sugar industry, Oil industry etc Dividend Policy if dividend is paid more WC & vice versa Business Cycle More WC during prosperity & less during depression Change in Technology

IMPORTANCE OF WORKING CAPITAL


Enables the co. to meet its obligations Ensures solvency of the company Ensures the credit standing of the company Facilitates obtaining credit from bank without much difficulty Enables a company to make prompt payment to its creditors

WORKING CAPITAL MANAGEMENT


Refers to all aspects of managing and controlling current assets and current liabilities. It is an attempt to solve the problems that arise in the management of current assets and current liabilities Objective is to manage the CA & CL efficiently to bring about satisfactory level of working capital so that business can run smoothly