Corporate financial management deals with managing the working capital of the company. it includes issues such as cash management, inventory management, debtor's management and short term financing. Each of these means of corporate financial management can be discussed in detail under the following heads:
Cash Management
Cash management services are offered by banks to the large corporate bodies. The cash management services required for corporate financial management are listed as follows:
1.Account Reconcilement Services : It becomes very difficult for companies to keep track of cheques that have cleared and that have not. Any error in this respect may not project the true balance situation. To avoid this problem, banks maintain a list of cheques that have cleared and those that have not. This process is known as positive pay.
- Advanced Web Services: The online services offered by many banks help in the corporate financial management.
- Armored Car Services : Banks assume the responsibility of picking the cash on behalf of the large retailers who collect huge cash volumes.
- Automated Clearing House : This is an electronic system used by companies to pay to its employees.
- Balance Reporting Services : The companies subscribe to the websites of the banks that inform the company regularly about its account and cash position.
- Sweep Accounts: In the case of any excess fund in the company's bank account, the extra amount is shifted to the money market mutual fund overnight and again moved back the next morning.
- Zero Balance Accounting : By this system each store of a company is given a specific account and money accumulated from all these stores are transferred to the main account of the bank.
Inventory Management: Inventory management is yet another mode of this whereby the company manages the inventory so that production may continue uninterruptedly. This is done by minimizing further investments in raw materials and reordering costs so as to maximize cash flow.
Debtors management : It is essential to formulate a proper credit policy so as to attract the customers. It should be so designed so as to nullify any effect on the cash conversion cycle and the cash flows by increased revenue.
Short term financing: Bank loans are availed for the purpose of short term financing
Financial risk management: Another aspect of this is the corporate risk management. The following tools are used for the financial risk management:
- Futures : The futures contract is standardized contract, which is traded on a futures exchange. It is designed to buy or sell an underlying asset at a specific date and time. The buyer or seller of the futures contract is obliged to fulfill the terms of the contract.
- Options : the options contract is almost the same as the futures contract with the exception that the contract holder has the choice to exercise the contract. There are two types of contracts- the call option and the put option. Options are traded through a clearinghouse. The buyer of the option is said to take the long position while the seller is considered to take the short position..
Investment banking : This is yet another method of corporate financial management. The role of the investment bank is to issue and sell securities in the primary market on behalf of the international companies. They raise capital for the international corporations through debt and equity.
Hedge Funds : Hedge funds are basically investment funds, which charge a performance fee. Hedge funds are different from the mutual funds, pension funds and insurance companies. Hedge funds can deal with the futures, swaps and other derivative markets.
Private Equity : The private equity is any equity investment that cannot be traded in the public markets. There are various categories of private equity investment. They are:
- Leveraged Buyout : Leveraged Buyout occurs when a financial sponsor has control over the company's majority equity through the use of debt.
- Venture Capital: the professionals, institutionally backed by outside investors to the new and nascent businesses, give this type of private equity capital.
- Growth Capital: The money that is borrowed under the Growth Capital is used for any corporate purpose.
- Angel investing : this is the method of investment by a very financially well off individual in lieu of ownership equity.
- Mezzanine capital: This is a wide term meant to cover unsecured, high yield, subordinated and preferred stock.
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