Capital Management Tactics in Corporate Finance
Capital is essential to carry out any sort of corporate objective. Capital can come from any source. It is mainly made up of debt and equity. Debt is generally referred to the burrowed money from financial institutes on the other hand equity is the shareholders’ money known as equity capital.
Debt holders have no share in the profit but are concerned about the return of burrowed money with interest. If the debt raises the capital rise as a result of this the rate of interest rises along with risk of capital. Now let us discuss different tactics that can help in proper management of corporate finance.
Ways to Corporate Finance Management
The corporate finance should have the right mix of debt and equity which is popularly know as capital structure. But before formulating the strategy of proper finance management it is important to identify the factors on which the business risk mainly depended.
• Instable demand can increase the business risk
• Varying sale price
• Difference in input cost and skills required to control price successfully in the market
• Capital required to carry out normal functioning along with rising input cost and lower sale price
• Fall in the demand of product without fall in high fixed cost
Apart from these new cost effective production ideas, fluctuating exchange rate etc can also increase the business risk. The business risk will be higher if the fixed cost is high. Along with that higher leverage will increase the business risk. For proper management it is important to find out lowest investment on fixed asset with lowest operational cost.
Lower debt finance should be used while to avoid facing threat of bankruptcy. The use of debt finance must be based on earning in terms of present value. It is important to analyze the past and present record of the firm with accurate finance resources. The capital structure must focus on market values. With the help of an effective capital structure it is possible to maximize the market value of the firm. The credibility of the firm mainly depends on the market value. With proper capital management it is possible to use the resources effectively to yield better return on investment Colbeck.