Corporate Finance Overview

Functions of Finance • Life blood of business (passive role except main line for banks & financial institutions) • To make money, one requires money (example of a fruit vendor) • Lubricant to keep engine moving (Reliance) • Growth pangs (liquidity crisis despite profitability eg JM) • Examples of Subhiksha Stores, Lehman Bros, CitiBank, General Motors

Corporate Finance Overview -Business activity concerned with planning, raising, investing & monitoring funds to achieve financial objectives of a corporate entity Corporate finance is an area of finance dealing with the financial decisions corporations make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximize corporate value while managing the firm's financial risks.

Finance Functions • Capital Budgeting- long term investments • Sourcing-capital structure & dividend payout • Day to day cash management- working (say moving…) capital & minimum idle cash Question: Is core working capital short term or long term for a going concern ?

Role of Finance Manager • • • •

• • • •

Management & custody of assets; insurance Cash flow management (liquid cash deployment) Negotiations with bankers & institutions Monitoring & reporting periodically financial performance (mirrored in MIS reports) & suggesting remedial measures; Cadbury’s example Cost control; activity base costing Tax planning Monitoring stock prices and external events No longer only a bean counter

Role of Finance Manager (contd.) • Ever changing • Computerisation (no longer Mehtaji busy tallying Trial Balance at B. Dyeing in 70s)

Qualities of a Finance Manager • • • • • • • • •

Vision & foresight Out of box thinking Personality Communication & presentation skills Initiative Intelligent & smart Managerial skills Sound technical knowledge Confidence

Relationship between Finance & Other Functions • Class to form groups : Production {1-7}, Engineering Services {8-14}, Sales & Marketing {15-21}, Corporate {22-28}, HR{29-35},IT{36-42}, Admin{43-49}, Purchase{50-56} • Present the two way relationship (one presenting from Finance angle and another from ,say, Production angle)

Financial Management Covers…. • Capital investment decisions; Maximise ROI=

(NP

x Sales)

( Sales

• • • • • •

Capital structure & raising of funds Utilisation of funds Cash flow management Working capital management Controlling risk & survival Goodwill & image building (helps better rating by bankers & suppliers, employee retention • Profit vs Wealth Maximisation………

CE )

Profit vs Wealth Maximisation • • 3. 4. 5. 6.

Market capitalisation = no. of shares x market price per share What do investors look forward to : Appreciation in share price Stability in earning Dividend Transparency (Enron & Satyam vs Infosys)

• • • • • • • • • • •

Business Risk

Demand Sales Price Input cost Ability to hike output price to input rise Develop new products timely & successfully Foreign (country & currency) Fixed cost (operating leverage) Labour Natural calamity (fire, quake, riot, flood) Technology obsolescence Credit or default risk

Finance Risk • • • • •

Financial leverage (high debt :equity) Interest rate Inflation Liquidity Bankruptcy All finance & business risks can be classified into diversifiable & non diversifiable. Steps to minimise risks and avoid intolerable risks

New Role of CFO • Corporate Communication (investor guidance, transparency) & Corporate Governance • Strategist- quick decisions (Capital budgeting, financing structure,….) • Deal Maker (Tata Corus) • Chief Risk Officer