Corporate Financing: Long Term and Short Term Research Paper

Corporate finance is an important area in financing that deals with the sources of funding and appropriate capital structures that are adopted by business corporations.

Increasing the value of a corporation requires managers and business stakeholders to perform an in-depth analysis of the business financial resources, to ensure maximization of financial activities for the achievement of business goals and objectives (Van Horne & Wachowicz, 2009).

Corporate financing departments are majorly concerned with an analysis of the capital investment decisions. Business economic growths are dependent on the long and short-term financial investment decisions that are a prerequisite in influencing business outcomes since they influence current and future cash flows into and out of the business.

Long term and short-term decisions are only likely to result in postulates benefits as long as they are analyzed properly prior to giving them a strategic consideration (Keown, Martin, Petty, & Scott, 2004).

This paper seeks to explore corporate financing in relation to the financial environment and to identify the roles and responsibilities in making long and short-term decisions for business organizations. An analysis of how to monitor the performance of long and short-term decisions in corporate financing will also be examined.

Additionally, the process of alerting business leaders on any anomalies that may surround the applicability of any decisions will also be given an insight. The paper will use a set of comparisons and real life experiences to develop a critical discussion of the essence of corporate financing and a conclusive summary postulates on the state of corporate financing in the business world today.

Discussion

Businesses have to make financial decisions on a daily basis for continuity of their operations in the market. Short-term corporate financing is aimed at a daily sustenance of business activities through an upholding of laws and regulations, while at the same time making money for the business stakeholders.

Long-term corporate financing is similarly aimed at this, but more towards a strategic sustainability of the business operations (Keown et al., 2004). Corporate department decisions, therefore, have to focus on both short and long term financial strategies simultaneously for the achievement of business objectives and goals.

Short term corporate financing considerations

When making decisions regarding the sources of short term financing of business activities for market and stakeholder viability, corporate finance departments have to consider the business internal environment first.

Current Assets

A corporation’s possessions in form of assets can be turned into cash at any time and in turn used to set off payment for business activities. They include a corporation’s cash, short-term property and financial investments, any payments that are payable within the next twelve months, inventories, prepaid expenses among others. These serve as an important basis of corporate financing since they can be freely used in funding day-to-day operations of a business (Van Horne & Wachowicz, 2009).

Current liabilities

These are the corporations’ liabilities, which are scheduled for payment within a specific fiscal year. Products and services that were acquired for use in a given fiscal year are all fall under current liabilities. The corporate organization is liable to make such payments by using cash current assets or withdrawals. These liabilities ought to be settled within the specific financial period (Gitman, 2008).

Current ratio

The current ratio is an established correlation that is usually arrived at by dividing the amounts of the current assets with that of the current liabilities (Gitman, 2008). The propensity of a business corporation to meet its financial needs is determined from this ratio as it indicates the financial inclination of a corporation towards either the current assets or the current liabilities.

This ratio is an important determinant in gauging the inclination financial weaknesses of a corporation. It is particularly important in establishing the extents of debts for which a company is liable (Graham, Smart, & Megginson, 2010).

Inventory management

The possession of inventories is important in corporate business organizations. A balance of the possessed inventories should be established to ensure that is neither too little nor too much, since either way, businesses tend to be at risks of spoilage or loss of potential sales (Van Horne & Wachowicz, 2009).

Inventory management strategies, therefore, need to be formulated to be prompt and expedite in addressing the financial requirements of a business. A proper inventory hence needs to be developed by corporate business organizations to avoid discontinuation of business activities.

Cash management

The process of soliciting, collecting, managing and distributing corporate business finances is an important determinant when short-term financial considerations are made (Jim, 2011). It ensures avoiding loss of trust of the stakeholders and financial controllers of business organizations.

It is undeniable that no stakeholders will tolerate mismanagement of business funds, as this can certainly threaten the operations of the corporation (Graham et al., 2010). Therefore, to maximize corporation’s financial operations, corporate departments have to establish effective and efficient financial management strategies to avoid jeopardizing the operations of corporations (Gitman, 2008).

Sources of short term corporate financing

Short-term financial considerations are a vital cog in driving corporation’s activities. Unless an applicable consideration is adopted, failure of financial institutions is inevitable. These sources are directly related to the internal environment of a business since they are mainly operational within the business set up and organization. As such, the sources of short-term corporate finance are explained below.

Overdraft

This are allowances for borrowing accorded by banks to financial institutions, but until a given limit with no options for discussions. Corporations can hence borrow at a minimal charge for the sustenance of business operations.

Trade credit

These agreements arrived at between corporations and other business organizations validating postponement of repayments until a later date. A commitment to cater for the extra costs incurred due to delay of repayment is also made. In as much as this is only given at an extra cost, it serves as a good way of funding corporation’s operations (Van Horne & Wachowicz, 2009).

Short-term loans

Financial institutions to corporate business institutions offer short-term loans as a way through which they can fund their activities at a little interest. Repayment of the loan is always s either at fixed or floating interests (Graham et al., 2010). This is a relatively secure method of financing corporate business activities, as banks are likely to give extensions, but at an interest.

Companies must analyze the profitability of these financial decisions to ensure that a balance with the risks is made to avert chances of running into losses (Van Horne & Wachowicz, 2009).

Long-Term Financial Considerations

These are mainly aimed at enhancing a corporation’s financial investment and capital structures. Although optimal capital structures are difficult to arrive at, corporate financial departments have to ensure that they develop applicable strategies for maximal financial utilization (Keown et al., 2004). Long-term sources of corporate finances are mainly from investments; hence, decisions to invest in a particular area have to be appropriately considered.

Investment decisions

Investments must be made in products and services that have a high propensity of yielding interests. As a corporate finance officer, each investment must have a minimum returnable benefits which if not achieved would call for termination of the idea to engage in that specific project (Van Horne & Wachowicz, 2009).

The value of projects must be balanced against the profitability obtainable form that project as earlier fore stated. The corporation also has to be in a position of sustaining the investment either through the possessed assets, finances or through financial services obtainable from other sources.

Financing decision

After proper identification of a project, the corporation has to ensure that the business’s financial position is able to finance the investment project to completion. Financial decisions are similarly based on projects that will an optimum value of the invested finance.

The sustainability of the investment has to be similarly considered to avoid midway failure of investment projects (Van Horne & Wachowicz, 2009). The type and method of financing the investment has to be as close as possible to the corporation’s assets and possessions.

Dividend decisions

In case an organization’s initial investments are unable to sustain the current investment projects, finances must be continually returned to the stakeholders in the forms of dividends (Keown et al., 2004). After an organization has met its financial needs, the remaining finances are returned to the stakeholders. The stakeholder preferences will thereafter be a defining factor in determining the form in which the money is given back to them either in form of dividends, spinoffs or in the forms of buybacks.

The sources of finance for the long-term corporate investment projects can take different forms. The acquisition of new assets is at times challenging if the business finances are not able to meet the costs of the asset, and the amount of finance that the corporation can borrow from its financial lenders is inadequate (Jim, 2011).

Such situations demand for financial sources considered in a long term. Company expansion is also an activity that would necessitate long-term financial investment since an overhaul of the existent structures is not practically applicable (Graham et al., 2010).

Equity financing

Corporations have an ability to sell their share to the huge number of investors to establish a financial base that would enhance funding in the long term. The value of the shareholders is usually elevated when such capital, equity capital, is channeled to fund development projects of the business (Jim, 2011).

Investor buying of shares is influenced by the trend of earning profit that is established in the company. Corporations that show a rapid positive trend in their return of capital are likely to sell more shares; hence, there is an increase in their market value (Keown et al., 2004).

The cost of equity financing is, however, comparatively higher than that of acquiring debts. Debts are deductible expenses that are payable by the corporations as compared to equity finances which are supposed corporation’s possessions. Therefore, equity financing has a relatively higher rate of incurring hurdles as compared to debts (Van Horne & Wachowicz, 2009).

Corporate bond

This has been repeatedly used to refer to long term debts. Otherwise, they are bonds issued to corporations in order to help them raise money necessary for effective sustenance of long-term business projects. The fact that corporate bonds are actually renewable before the expiry of the return period makes it one of the major sources of financing business projects (Keown et al., 2004).

This type of bond is versatile enough as investor and issuers can manipulate it to suit their needs. For instance, investors can convert bonds into equity. Issuers on the other hand redeem it before its maturity date.

With the advancements that have been experienced in the corporate world, some corporate bonds have become taxable. Corporate debts that mature before a financial year typically elapses are referred to as ‘Commercial paper’.

Capital notes

These are also a potential source of long-term business financing. While some are convertible into shares, others are bonds. It is a form of security option offered to corporate business institutions and is a form of an investment vehicle that has been used to pioneer investment programs that corporate organizations wish to engage in. they are issued mostly in relation to debt-for-equity swaps (Van Horne & Wachowicz, 2009).

These may serve as a source of financing corporate investments, though they are extremely risky in case cash flows are insufficient to offset the promised payments.

Long-term loans

Corporations have also relied on long-term loans to finance their business investments (Jim, 2011). A few financial institutions in the current corporate world offer these moneylending services. In spite of the large interests that are likely to be incurred when returning this kind of a loan, a proper analysis of a long-term investment to identify possible risk and success factors is an important prerequisite to ensure that corporate institutions obtain the highest profits from investments using long-term loans (Van Horne & Wachowicz, 2009).

A comparison of the short and long-term considerations and sources of capital

The options for financing corporate business activities on the short-term are many as compared to those available when making long-term financial options. The apparent reason for this is the risk management strategies that work better on a long term than on a short term (Gitman, 2008).

In as much as long-term business, financing may mean a prolonged and sustained business success, short term financing of corporate business operations is a major step towards establishing a dynamic and diversified approach to business management (Keown et al., 2004).

How to alert organization leaders on any anomalies and opportunities

An established execution plan should be at the forefront when conducting financial analysis and investments. Using a plan, the risks surrounding business operations are analyzed effectively and a strategic for going through them developed. Just like in any business fields, corporate financing also consists of a number of operational risks since finances act as a major driving force in steering business activities (Van Horne & Wachowicz, 2009).

When organizational leaders are made aware of any anomalies going on with particular corporate investments, legal procedures that are often called for to solve disputes between financial investors and stakeholders are avoided. In order to establish an efficient reporting system, an early warning on potential sources of anomalies is necessary.

As such, leaders would be psychologically prepared for any anomalies that may be encountered (Keown et al., 2004). The failure points of the investment should as well be properly communicated to the organizational leaders. The estimated costs of the anomaly should be provided additionally to help organizational leaders in preparing through the creation of security finances (Jim, 2011).

In case of postulated success, as the corporate finance officer, such a huge potential should be communicated to the leaders through an established reporting from the different corporate sectors organizing and coordinating the project (Gitman, 2008). An extensive review of a project should be conducted to ensure that all the sectors of the corporate business organization function as a single unit for financial safety and security (Van Horne & Wachowicz, 2009).

Summary and Conclusion

The success of corporate business organizations heavily relies on effective methods of financial consideration both on the long and short terms. A working capital strategy is only arrived at if the corporate institution performs an analysis on the risks surrounding any financial sources and the corporate investments (Jim, 2011).

A working capital structure is also an important prerequisite in ensuring that financial moves of corporate organizations do not fail. However, this strategy is only possible through the establishment of clear goals and objective meant for improving profitability of financial institutions (Keown et al., 2004). Leaders, stakeholders and corporate departments have a role to play in any case something is to be attained.

With the rapid technological advancements that have turned instilled dynamism into corporate financing, corporate business institutions need to improve their short and long-term financial policies to ensure that they address the changing stakeholder and market needs to avert chance of running into losses (Gitman, 2008).

It is important to remember that short-term financial considerations are more practical and applicable as compared to the long-term considerations that are based on mere postulation. However, together they form a vital part in corporate business financing.

Reference List

Gitman, L. (2008). Principles of Managerial Finance. Boston: Pearson Education.

Graham, J., Smart, S., & Megginson, B. (2010). Corporate Finance. Mason, OH: Cengage Learning.

Jim, McMenamin. (2011). Financial Management, An introduction. London: Routledge.

Keown, A., Martin, J., Petty, J., & Scott, D. (2004). Financial Management: Principles and Applications. Harlow: Prentice Hall.

Van Horne, J., & Wachowicz, J. (2009). Fundamentals of Financial Management. Harlow, FT: Prentice Hall.