An increase in a firm’s cost of production lowers the equilibrium financial market value of the company. Higher production costs mean that the company’s profits are low, which lowers the revenue of the firm and ultimately its market value. An increase in a company’s cost of financing lowers the equilibrium market value of a company because of interest payments on debt lower income and cash flow. Additionally, an increase in debt financing will increase a firm’s liabilities. An increase in the market’s discount rate increases the value if a firm because it lowers production costs. Companies can access inputs cheaply when the discount rate is high, which in turn increase profitability and the firm’s value. An increase in sales revenue rises the equilibrium financial armlet value of a firm. A firm with high sales revenue report higher profits. An increase in projected future profits increases a firm’s financial market value because investors are more likely to invest in a firm that will be profitable in the future.
When a big competitor enters the market, a retail manager will adjust his company’s financial management practices by increasing marketing expenditure to maintain its position. Additionally, the manager would invest in new technologies to increase efficiency and boost productivity. When technological progress makes it easier to sell online, the financial manager would increase investment in developing an online platform and reduce expenditure on traditional distribution channels. At the start of the Christmas season, the financial manager would increase the stock of the retail company to meet the expected increase in demand. The manager will also spend more on promotion to attract customers. When the economy enters the recession, the manager will cut expenditure on new inventory and marketing activities due to the expected decrease in demand. When a nationwide banking crisis start, the manager would lower expenditures on new inventory, marketing, and may even lay off employees due to the expected decrease in demand and revenue.
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The current ratio is the ratio of a firm’s current assets to liabilities. Return on assets is the ratio of net income to the average total assets. The current ratio is an important financial ration because it measures a firm’s ability to pay its debts (liquidity). Return on assets measures a firm’s efficiency in using its assets to generate profits. A good benchmark to use for current ratio is the short-term solvency of the firm, while return on assets is the profitability of a firm relative to its assets.
A company may decide to lease capital equipment instead of buying for two reasons. First, leasing capital equipment lowers upfront costs because the company only pays the first lease and the costs of running the equipment. Secondly, companies lease equipment because lease payments are deductible business expenses. The tax savings can be used to offset the costs associated with the lease. Conversely, a business may decide to purchase capital equipment instead of leasing because of the associated benefits. One benefit of buying capital equipment is the lower overall cost of acquiring the equipment compared to leasing. Secondly, the company fully own the equipment and can use it as a security for a loan. Lastly, companies purchase capital equipment to avoid long-term lease agreement that may be difficult to meet.
The capital budgeting process is an intricate process involving five phases. The planning phase is the first stage that entails investment strategy and the production and the initial analysis of project proposals. Investment strategy offers a framework that determines, directs, and defines the identification of project opportunities. The other important phases in the selection phase. During this phase, the company determines whether the project is worth pursuing. The worth of a project is judged using the discounting and non-discounting criteria. Skipping one of the phases of the capital budgeting process to save time is not financially sensible. Investment requires a significant capital outlay; therefore, firms must plan carefully on how to spend their capital. It is better to spend a lot of time in the capital budgeting process and has a successful project instead of saving time and choosing a worthless project.
A company will increase its dividends if its new profits increase because dividends are paid out of a company’s profits. Secondly, a company would increase dividends if it is not pursuing growth and expansion. The profits are paid out to investors in the form of dividends. A company would buy back some of its common stock shares for many reasons. One reason is to consolidate ownership because common stock represents a small stake in the issuing company. Another reason for buying back common stock is to capitalize on share prices when the economy improves. It mainly occurs when the stock of the company is undervalued. Finally, companies buy back common stock to preserve its share price. A company may decide to pay down its debts to lower interest payments, improve their credit rating and enhance the value of its business. A company may decide to increase its use of internal financing when there is extra cash after expenses. Additionally, internal financing is utilized by a company because it is less expensive compared to external financing because it does not have to pay interests. A company may decide to go private because the acquisition is financially beneficial. Additionally, private companies are not subjected to stringent reporting and regulatory conditions.
Companies can avoid a backlog of orders when sales exceed expectations by implementing customer demand management, supplier leads time management, and internal throughput management. Defects on new products can be avoided by implementing quality control and testing the product to ensure they meet required standards. A company can offer more credit when it already has a bad debt problem selling some of its equity to raise capital. Companies can improve their credit rating with suppliers after paying some late by paying down payments for supplies. A company can lower its cost of financing when the market interest rate has increased by utilizing internal financing.
Liquidity risk can be managed by a company by creating liquidity buffers. Liquidity buffers are contingency measures that the company can use to access funds. Interest rate risk can be managed by formulating risk policy framework that details risk identification and quantification. Credit risk can be managed by thoroughly checking a customer’s credit record to identify risky borrowers.
Financial ratio analysis of a firm’s projected cash flow budget could be used by managers for financial planning because liquidity and cash ratios determine if the company can afford long-term business growth or investment in capital assets. Working capital and current ratios can be used to evaluate whether the firm has sufficient liquidity to meet its daily and short-term expenses. Budgeting and financial planning are important aspects of business planning because they detail how a business spends its money and ensures sufficient liquidity for important things. Additionally, they help companies avoid debts or manage debts of they are already indebted.
