Correct Working Capital Management Determines Company Well-Being

Financial management is a central element in organizational success. Business managers use a wide range of tools to help them make the right strategic decisions in terms of capital budgeting, capital structure, and working capital management. Those three areas of corporate finance ought to be the center of focus by top managers and executives. A lack of understating of those concepts or a weak financial strategy and its implication on the business can lead to a disaster for the firm.

The Weighted Average Cost of Capital (WACC) is an important capital investment tool that is beneficial to the company’s decision making. It is through this process that a company can be in a position to make appropriate decisions that will help undertake different business activities. Financial structuring strategies are facilitated through this process considering the ways in which the process is sustained and effectively done in a way to complete the best provisions. For investors, WACC helps in making investment decision.

One critique about the method is the fact that it only considers one channel of decision making, which might affect the entire process. It does not provide a variety of channels that will help solve business investment problems. This point makes the method biased and not able to account for different external business challenges. The method does not provide the outlay of appropriate equity recapitalization and determines the right dividends to be paid out. The financing of working capital expansions is also a necessary process that helps the process to be effective and ensures that correct principles have been appropriately completed.

Equity and debt are two primary sources of financial accessibility through the capital markets. The identified capital structure refers to the general composition of the company's findings. The alterations made on the capital structure can be used to influence the general cost of capital, net income, leverage ratios, and the liability of public traded firms. The WACC measures the total cost of capital through the firm's processes.

Assuming the cost of debt, which is not the same as the cost of equity capital, the WACC is seen to be the change in the capital structure. The cost of capital equity is typically higher compared to the cost of debt, so increasingly through the financing of the WACC. Equity financing does not affect profitability achieved. However, it can be used to dilute existing shareholders since the net income is divided among a more significant number of shares. The company raised funds by equity financing through the actual items in cash flows from the financing actions through the increase of the anticipated balance sheet.

The method of debt financing is essential since it includes the principle, which must be rapid through the lenders — as debt does not dilute the ownership of the interest payment through the reduced net income and cash flow. The reduction is in net income, which also helps to represent the tax benefits generated through the lower rate of taxable income. Anytime debt is increased, there will be a high leverage ratio, including the obligation to equity, and the total capital is anticipated to increase. The aspect of debt financing often comes with the covenants, which means that the firm must be able to meet individual interests covered through the debt ratio requirement.

Other different hedging instruments are key futures and forwards contracts that were completed. Both of the given proponents are similar except that there had been a different intermediary form of exchange that would affect how things were being completed. The fluctuating prices are indicative of the currency movements. The approaches to price new equity are significant. The valuation of the company is done by several independent and external agencies that will accurately help to derive at the given stock price for the equity process.

Conclusion

Finance professionals face two critical financial decisions. The first decision involves the type of investments the organization should pursue, and the second decision entails the financing of such investment. Financial management plays a central role in the well-being of an organization and contributes to its value creation. Concepts such as WACC and IRR are essential valuation metrics that provides managers with a clear understanding of the company and its projects financial performance.

References

• Ajmera, C.C. (2019). Financial leverage, earnings, and dividend policy: An empirical analysis of steel companies in India. Lunawada, India: Red’ Shine Publication PVT, LTD.
• Bernanke, B. S., Campbell, J. Y., Friedman, B. M., & Summers, L. H. (2008). Is there a corporate debt crisis? Brookings Papers on Economic Activity, 1988(1), 83-139.
• Brealey, R.A., Myers, S.C., & Allen, F. (2017). Principles of corporate finance. New York, NY: The McGraw-Hill Companies, Inc.
• Brewer, P.C., Garrison, R.H. & Noreen, E.W. (2005). Introduction to managerial accounting. New York, NY: The McGraw-Hill Companies, Inc.
• Bruner, R. F., Eades, K. M., Harris, R. S., & Higgins, R. C. (2008). Best practices in estimating the cost of capital: survey and synthesis. Financial practice and education, 8, 13-28.
• Risius, J.M. (2007). Business valuation: A primer for the legal profession. Chicago, IL: ABA