Keeping corporate finances in order is an important task for any business. Although this sentence is a basic premise in the organizational environment, to make a detailed projection with consistent data and unite them in a way that allows a complete analysis is not something simple.
Service companies, for example, deal with an intangible “product,” which makes financial calculations very different from a product industry. This creates the need for the services of a professional with a thorough knowledge of corporate finance, from its concept to the way in which financial health measurements are made and tips that help maintain the sustainability of the enterprise.
In our article, we’ll help you understand about finance and the right way to deliver related services to your clients. Check it out!
What are corporate finance?
For many people the emergence of companies would have occurred at the birth of modern capitalism in the mid-sixteenth century. However, business history began well before, being a medieval creation. Since then, corporate finance has been a part of everyday life for entrepreneurs and employees. But, after all, how can we define this term?
Corporate finance is linked to the studies carried out on the decisions linked to the money of a business, which basically involves everything that is decided within the enterprise, no matter the area.
The concept is based on the principle of maximizing the value of a company. Through finance, issues will be decided such as the investments to be made, the need for financing projects by third parties, the correct establishment of dividends, payment of bills, separation of fixed and variable expenses, among other actions.
The importance of financial control
By controlling finances, the company is aware of its real financial situation. In other words, it knows exactly how much it has in cash, the amounts that can be invested, among other variables.
Having this kind of resource management is also important for the feasibility studies of projects, the need for credit sources, the establishment of strategies to capture the trust of creditors, in addition to promoting the effective and rational use of available resources.
Finally, knowing the financial details helps in the process of synergy between the sectors, since the organization has control over the financial needs of each one, allocating the resources according to the demands.
How are corporate finances worked out?
As we have seen so far, finance is much more than a concept that involves paying bills and making investments. Given the explanation of the previous topic, we now need to know how to work them properly as a service.
It is worth remembering that a company of products and a company of services differ in some points, such as the scope of its operations. For example, a service business operates more locally, which means that entrepreneurs need to pay attention to the local economic reality, such as price formation.
Therefore, the following tips are useful and will help you to work with greater consistency in the different types of business. Check it out!
The first aspect worked on when talking about corporate finance is strategic planning. It comprises a series of steps, such as budget, strategies, scenarios, various policies and budget control tools.
In the case of the budget, revenues, expenses, costs and investments from each of the company’s sectors will be projected. The ideal is that it is carried out annually, always projecting the obtained costs, to align the strategies of the company.
In the strategy development phase, the organization should align its goals and objectives. For this, it will be necessary to take in consideration the sales projection of the services, costs that they will have, investments and the financial situation. Thus, it will be possible to have a base scenario so that the budget is as faithful as possible.
In the process of preparing scenarios, the optimistic, neutral and pessimistic scenarios should be considered. In each one of them, a financial projection should be made, taking into consideration previous financial reports of operation and considering inflation, market, among other details.
The financial planning of service companies also needs to consider some policies, such as receipt (which means of payment will be accepted, deadlines, among others), but also payment, forms of payment to their suppliers, etc..
Finally, the plan considers the control tools that will ensure that all the activities mentioned are carried out effectively, i.e., software and spreadsheets, which will help to keep the finances up to date.
Knowing the economic and financial viability of a business helps to delimit the value charged for the product or service, balancing the finances, in order to understand if the return on investment will be something positive. With this, entrepreneurs can eliminate those services or products that are not advantageous to the company, or even reformulate them to make them more attractive to consumers.
In order for this analysis to be effective, it is necessary to pay attention to a few steps, such as:
- sales projections for each of the services offered;
- projection of costs, expenses and investments;
- monthly cash flow projection.
After the cost and sales projections, which helps in obtaining the cash flow, a new phase of the process enters: the analysis of indicators, which collaborates with the process of defining the viability of the services offered.
Among them is the Minimum Rate of Attractiveness (MAT), which represents the minimum expected return on investment in a project, for example. For this, it takes into account variables such as the available capital and the expected profit margin.
Asset and liability management
Asset and liability management is also part of everyday business, and it is important that you are aware when you offer this service in your portfolio. Assets are the assets held by the organization, such as cash, inventory and receivables. We can define them as the amounts that can be invested and generate cash flow.
In the meantime, liabilities are liabilities, i.e. amounts that need to be paid over time. The management of these assets foresees the use of tools that help the investor (entrepreneur) to make decisions, creating awareness about the risks, which increases the chances of success.
To this end, the Asset Liability Management (ALM) technique is used, which helps in risk management, preventing the disintegration of assets and liabilities. It will allow the entrepreneur to vary his or her investment portfolio, for example.
The work on your part will be to manage how this will be done, aiming at maximum profitability and considering variables such as pension funds and also investments according to financial institutions.
How to measure the financial health of the business?
Corporate financial control is essential, as we have seen so far. Therefore, it is necessary to learn how to measure the financial health of the business. In the previous topic, we even mentioned performance indicators. Next, we’ll show you some more that can have a significant impact on finance and are essential to your work.