Financial planning is the process whereby the company attempt to estimate future company assets. The financial planning used to estimate asset investment for the corporation is forecasted to ensure future assets are enough to support the corporation activities.
Working Capital Management
Working capital management is the process of controlling and planning the mix and levels of current assets for the firm and financing them. Working capital management needs a financial manager to determine the amount of cash, account receivables, inventories and other liquid assets the company wishes to hold in the future (Reve & Sarria-Allende, 2010). Gross working capital is one of the working capitals which should be managed. Gross working capital is the firm current asset such as short term securities, cash, inventories, bills receivables and debtors (Lee, Lee, & Lee, 2009). Financial managers should ensure that the investments in current assets are neither inadequate nor excessive. The firm’s requirement for working capital changes is based on the changes in the business activities. Company finance managers should ensure there are ways to source funds in case of shortfall and what and where to invest in case of excess funds.
Financial Instruments
Marketable securities are one of the financial instruments which can be converted to cash; it includes common stock, certificate of deposit and government bonds. These securities can be redeemed or sold within a year. They are debts expected to be sold within a year and are listed on the current market value in the balance sheet as a current asset. Marketable securities are held to maturity before they are sold. They are listed as short term or long term, based on the date of maturity and management’s intention to convert into cash. Treasury bills are securities, which are given out by the treasury and are given for a short time. The treasury deals with the accounts having a frequently organized auction to refinance issues. Treasury Bills further assist the present investment in a deficit government. In addition, it deals with accounts on an asymmetrical cornerstone to silken out the unusual flow of income from the business.
Certificate of deposit is one of the marketable securities, which proofs the deposit deposited by the depository institutions. This certificate contains some data such as deposit allowance, interest rate, the date of maturity and the procedure of calculating interest rates. Large negotiable certificate of deposit is always given out in denomination terms such as $1 million and above. Commercial paper is one of the shortest terms of marketable securities, which is unsecured promissory notes given out by the foreign investments and companies. Users of commercial paper adapt to effective lifting of big allowance of capital and have no exchange commission (SEC) costly securities for registration. Government bonds are either long-term or short-term debt securities issued by the sovereign agencies or government. The government bond rate of interest is low compared to corporate bonds and act as a government source of finance.
Debt and Equity Options
The use of both equity and debt enables the investor to meet the requirement when expanding the investment (Amihud & Lev, 1999). Debt financing is a process of acquiring funds from business, persons or institutions that offer credit services e.g. banks. The investor should make a pledge to repay it with interest at a fixed rate within a specified period of time. I would advise the investor to use debt finance since debt finance does not allow the lender to control the investment and the relationship between the lender and the debtor ends after the full repayment of the debt is made. Interest paid is tax deductible and debt can either be a short-term or long-term. Since the principle and interest are known in advance, the investor will be able to forecast expenses because debt repayment is fixed.
Equity financing is the process of funding the investment through re-investing the amount, which could have been distributed to shareholders. I would advise the investor to use equity finance because it has not risked as it is not exposed to competitors who are in the market. The investor will not be forced to repay equity in case the business fails and the equity owners can take a long period without expectation of repayment or not to expect immediate repayment of their investment. Equity enables the investor to tap into investors systems, which add credibility to the business. The investor will not be forced to channel the profit to repay loan and the investor also has enough cash to expand and manage the investment.
Capital from a Foreign Investor
Business can acquire capital from foreign investors if the home country is politically unstable and thus debt finance is not issued at the moment. Investors can also go for foreign capital if the exchange rate is favorable to their home country. If the investor is seeking capital finance which is not offered in the home country he or she can plead other countries.
Risk and Rewards
The risk associated with foreign investments includes politics, cultural events, economics, current fluctuations and legal issues. Investing international exposes invested capital to different economic stability and political environment, especially in less developed countries’ markets. These markets may either rise or fall and this will frustrate the investor who was solely relying on timing markets. The procedures of markets in less developed countries operate differently compared with the domestic markets with known procedures. Cultural forces of the foreign country may cause a negative impact on international investments.
Cash money held in the foreign company is subjected to double legal entanglement between the foreign country and home country. When an investor wishes to take an action, the issue may not be solved clearly because it will be controlled collaterally. If the investors sue the foreign company situated in the home country and win the case, the investor will be advantaged because the jurisdiction applied is common to the investor hence could be better to resolve issues in the home company.
The capital value of the investor is subject to current exchange rates and the return will be based on strong or weak rate of exchange, which will affect the expected return at the long run. The reward on the diversification includes personal interest, portfolio diversification and portfolio fortification. Under portfolio fortification, business took place everywhere in the world but there is no way to globalize potential opportunities. Investment in foreign economies allows the investor to explore emerging markets, which has not reached their potentiality.
Portfolio diversification exposes the investor to both home and foreign inventories diversities of investments. This enables the investor to reduce risks by distributing it out over broader geographical areas and to multiple markets and economies. Under personal interest, the investor will be able to seek entrepreneurs from countries with religious, emotional or familiar attachments. This is one way of improving the growth of the country’s economy due to the success of the development of companies to create employment opportunities and generate government revenue through tax.
Common Stocks versus Corporate Bonds
The relationship between the return and risk of investment at high rate of return on investment has high rate of risk. The safest investment does not have high risk and their return is low. Corporate bonds have lower rate of risk and also offer low rate of return. Common stock has a rate of return with high rate of risk. In regard to corporate bonds, the company issue bonds represent the biggest of the market bonds. The risk related to corporate bonds depends on the performance and stability of the issuing company. In case the company is declared bankrupt it is not able to pay any return on investment or repay the value of the bond. Before issuing corporate bonds, the risk should be assessed based on the company credit worthiness through the rating agencies.
When one purchases a common stock during public offering will automatically become a shareholder of that company (Brealey, Meyers, & Allen, 2013). Some companies pay returns to its shareholders in the form of dividends based on the shares held. Another form of paying returns to shareholders is the profit realized through trading on the stock exchange with the condition that one sale the share at a higher price than the price paid for. Some of the risks of holding stock include chances of losing money paid for the share and any projected profit in case the price fall below the purchase price.
Risk associated with corporate bonds held is low compared to those of common stock so long as invested in the right company. In case of bankruptcy, the corporate bond holder has first paid the claim before the common stockholder. Bonds carry low rate of risk and are paid before the common stock holders compared with common stock with high risk and paid later after the common stock have been paid.
Common stock has a large share price track than corporate earnings. Common stock Price changes from zero to infinity. Bonds prices changes within a short time to 6%; hence its return per year changes depending on the economy and market.
Diversification in a Portfolio
Diversification helps reduce the risk through spreading the risk among different investments. The security of diversified investment should vary. Invest in different investment with different rate of returns. Level of the security varies among the companies invested in order to reduce unsystematic risk in different forms of companies.
About the author: Eaten Turner is a bachelor in English philology and literature at California University. Eaten is currently working as one of the best writers at the EssaysWriters.com He also studies feminine psychology.
