Corporate financial management plays a huge role in the business activities of the enterprise. In current business activities, corporate financial management plays the following main roles:
- Mobilize sufficient and timely capital for business operations of the enterprise.
During the operation of a business, short-term and long-term capital needs often arise for the regular business operations of the business as well as for development investment.
The role of corporate financial management is first and foremost in correctly determining the capital needs for the business operations of the enterprise during the period and then choosing appropriate methods and forms to mobilize capital from within and outside to promptly meet the capital needs for the operation of the enterprise. Nowadays, along with the development of the economy, many new forms have emerged that allow enterprises to mobilize capital from outside. Therefore, the role of corporate financial management is increasingly important in proactively choosing forms and methods of capital mobilization to ensure that the enterprise operates smoothly and continuously with low capital mobilization costs.
- Organize the use of capital economically and effectively.
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The Impact of Capital Structure on Business Performance
The business performance of an enterprise depends largely on the organization of capital use. Corporate financial management plays an important role in evaluating and selecting investment projects based on the analysis of the profitability and risk level of the project, thereby contributing to selecting the optimal investment project. Timely mobilization of capital sources is very important for enterprises to seize business opportunities. On the other hand, maximizing the mobilization of existing capital for business activities can reduce and avoid losses caused by capital stagnation, while reducing the need for loans, thereby reducing interest payments. The formation and good use of enterprise funds, along with the use of reasonable forms of material rewards and penalties, will contribute significantly to motivating employees to be attached to the enterprise, thereby improving labor productivity, contributing to improving production and business and improving the efficiency of capital use.
- Closely monitor and inspect all aspects of the enterprise's production and business activities.
Through daily cash disbursements, financial status and implementation of financial indicators, business leaders and managers can make a general assessment and control all aspects of business operations, promptly detect existing problems in business, and from there make decisions to adjust operations in accordance with actual business developments.
- Financial management plays a decisive role in the optimal use of a business's resources based on analysis, planning and control activities throughout the business process.
- Corporate financial management is the basis for the effective distribution and use of resources in the economy. Because corporate finance is an integral part of the overall national finance.
b. Contents of financial management
Financial management includes the following main contents:
- Investment analysis
- Working capital management
- Sources and uses of capital
- Determine capital structure
- Dividend policy
- Risk and return analysis.
7.2. DIVERSIFICATION OF CAPITAL SUPPLY SOURCES
7.2.1. Sources of capital supply of enterprises
There are many ways to classify capital sources for businesses. Based on the source of supply, capital sources can be classified in the most general form into internal sources and external sources. On that basis, people continue to classify more specifically according to the methods of mobilization or into specific capital supply objects.
7.2.1.1. Self-funded sources
a. Fixed asset depreciation
Fixed assets are means of labor involved in many production processes. During use, assets gradually wear out and gradually transfer their value to the value of finished products. Depreciation of fixed assets is an objective process, depending on many factors such as the quality of the fixed assets themselves, natural factors, the intensity of use of fixed assets, etc. During the process of using fixed assets, enterprises must determine the level of their wear and tear to gradually transfer the wear and tear value to the value of products produced from those fixed assets. Determining to gradually transfer the wear and tear value of fixed assets to the value of products is called depreciation of fixed assets. Determining the specific depreciation level depends on the reality of fixed assets as well as the subjective will of people. For state-owned enterprises, to a certain extent, the process of determining depreciation is influenced by the state's intentions through regulations and policies of financial agencies in each period. Other enterprises can choose their own specific usage period and depreciation calculation method. In specific financial policies in each period, enterprises can choose and adjust fixed asset depreciation and consider this as a tool to adjust.
Stock issuance
State budget investment support fund
Bond issuance
Foreign capital (ODA)
misappropriated money
1. Advance
2. Pay later
Foreign Direct Investment (FDI)
MECHANISM
SELF SUPPLY
adjust its internal capital supply. However, it should be noted that depreciation adjustment cannot be done arbitrarily and without planning, but must be based on long-term and short-term financial plans that have been determined. On the other hand, it should be noted that increasing depreciation of fixed assets will lead to an increase in fixed asset depreciation business costs in product cost, so it is always controlled by product selling price.
Bank credit
Leasing
Joint venture
Public-private partnership in infrastructure construction
Buy on credit
1. Adjust asset structure
2. Fixed Asset Depreciation
3. Reinvestment
Figure 7.1. Sources of capital supply of enterprises
b. Reinvestment accumulation
Reinvestment accumulation is considered by enterprises as an important source of financial self-sufficiency because it has the following basic advantages:
- Businesses can be completely proactive
- Reduce dependence on suppliers
- Helps businesses increase financial potential by reducing debt/equity ratio
- It is even more meaningful for small and medium enterprises in conditions where they have not yet created trust with financial suppliers.
The scale of self-sufficiency in capital accumulation from reinvestment accumulation depends on two main factors: the total profit earned in a specific business period and the enterprise's after-tax profit policy. The specific total profit earned in each period depends on the business scale and quality of business operations of the entire enterprise.
business during that period. Profit distribution policy depends primarily on the type of business.
For state-owned enterprises, all profits earned must be used for the following:
- Pay for the use of state budget capital according to regulations.
- Payment of prescribed fines is not included in business expenses.
- Establish special funds
- Profit sharing for joint venture partners
- The remainder is used to establish corporate funds. According to current regulations, it includes the following types:
+ Development investment fund
+ Financial reserve fund (10%) and limited balance less than 25% of working capital
+ Unemployment benefit reserve fund (5%) and balance not exceeding 6 months salary
+ Bonus and welfare fund with deduction level less than 2 - 3 months salary.
For joint stock companies, all after-tax profits will be used to set aside a mandatory reserve fund (5% of profits) until the fund balance is equal to 10% of charter capital. The remaining amount depends on the company's specific distribution policy in each period, for example, used to set aside:
- Reinvestment fund about 15 - 45%
- Research and development and training fund about 5% - 10%
- Risk reserve fund 0% - 5%
- Bonus and welfare fund minimum 10%
- The remaining amount is dividends divided by shares.
c. Adjusting asset structure
Due to the fluctuating business environment and changing business tasks, there is always a phenomenon of excess of one type of asset but a shortage of another. Adjusting the asset structure is to promptly find a solution to sell excess fixed assets that are not (yet) used. On the other hand, on the basis of regular inspection, calculation and re-determination of current asset reserves, applying the optimal reserve model to reduce the amount of unnecessary current assets in stock, ensuring a reasonable amount of each type of current asset in stock. Although this method does not increase the total production and business capital, it is very effective in increasing capital for necessary activities on the basis of reducing capital in unnecessary places.
The self-financing method has a great advantage that it is completely proactive for the enterprise, not dependent on the outside, the enterprise has full rights to use it in the long term with low capital cost. On the other hand, the effort of self-financing is always considered a factor for external capital providers to consider the possibility of lending capital.
However, the self-financing method also has basic limitations: the scale of capital supply is small and additional sources are always limited.
7.2.1.2. Capital mobilized outside the enterprise
To supplement capital for operations, businesses can use debt from the following sources:
a. Capital supply from the state budget
With the form of capital supply from the state budget, enterprises will receive a certain amount of capital from the state budget. Normally, this form does not require many strict conditions for enterprises receiving capital as other forms of capital mobilization.
However, the form of capital supply from the state budget is increasingly narrowing in both scale and scope of funding. Currently, the subjects provided with capital in this form are usually state-owned enterprises that the state has determined to maintain to play a leading role, investment projects in the fields of public goods production, public service activities that the private sector does not want or is unable to invest in; large projects of special importance directly invested by the state.
b. Borrowing capital by issuing shares
Common stock
- Concepts:
+ Ordinary stock is a security that represents permanent ownership of a business because there is no expected maturity date.
+ The maximum number of shares that a business is allowed to raise is called legal capital. The number of shares corresponding to the legal capital stated in the business's charter is called charter capital. The shares that will be offered for sale to the public for investment are called planned shares and the number of shares issued is usually lower than the number stated in the charter. The difference between the shares allowed to be issued and the shares issued is called reserve shares.
+ Equity = Total assets - Liabilities.
+ The value written on the surface of the stock is called par value.
The price of shares on the market is called market price. The value of shares reflected in the books of a joint stock company is called book value. The par value is only meaningful when shares are newly issued or in a short period of time. Market price reflects the market's assessment, reflecting investors' confidence in the business's operations. Market price fluctuates around the book value of shares depending on the supply and demand relationship in the market.
- Characteristics of common stock:
+ Common stock shareholders are owners of joint stock companies.
+ Common stocks are a shield against corporate bankruptcy.
+ Flexible stock payout.
+ The cost of common stock is higher than the cost of retained earnings.
Preferred stock
In the cost of capital section we show how intermediate the preferred stock is between common stock and bonds.
Normally, in the total mobilized capital, preferred shares only account for a small proportion. However, in some cases, the use of preferred shares is appropriate. That is when the enterprise wants to increase the owner's capital, prevent bankruptcy of the enterprise but not share leadership rights. However, when the financial situation of the enterprise is difficult, paying regular and fixed interest is also disadvantageous for the enterprise, but they can also postpone paying dividends for a certain period of time. The settlement of dividend policy is often associated with the rights of preferred shareholders and is stipulated in the charter of the enterprise. For example, when preferred shares are not paid dividends, the shareholders of those shares may have the right to vote....
c. Borrowing capital by issuing bonds
- Secured bonds: the characteristic of this type of bond is that they are secured by the assets of the enterprise. The assets to secure the issued bonds are usually the real estate of the enterprise, in some cases the collateral can also be factories or expensive equipment. When issuing mortgage bonds, the enterprise is responsible for keeping the mortgaged assets in the best condition to secure the loan.
However, it should also be noted that a certain asset can also be used as security (mortgage) for many bond issuances. In some cases, the issuing enterprise records the order of issuances to give priority, but the total value of all bonds must not be greater than the value of the mortgaged asset. Thus, secured bonds provide bondholders with a fairly high level of safety.
- Unsecured bonds: this is a common type of bond in businesses. Unlike secured bonds, unsecured bonds are bonds that do not have any specific assets to guarantee their ability to pay, but they are still guaranteed by future income and the liquidation value of the business's assets according to the priority of bankruptcy law.
In corporate bankruptcy law, the priority of bonds always comes before that of stocks, but in bonds, newly issued bonds have a higher priority than those issued before them.
- Income-based bonds: income-based bonds are bonds in which interest is paid only when the borrower (business) earns a profit. When the profit
If the amount paid to the bondholder is lower than the amount due, the bondholder will only receive payment equal to that income and will not be entitled to declare the borrower bankrupt. The remaining amount paid to the bondholder will be carried forward to the following years according to the provisions in the contract between the two parties.
For businesses, this type of bond does not limit debt leverage like other bonds because this type of bond is highly flexible, very suitable for businesses that are facing financial difficulties.
- Fixed-rate bonds: this is the most common type of corporate bonds. The interest rate is stated on the face of the bond (Coupon rate) and does not change throughout its term. Bond interest payments are also clearly regulated and are usually paid twice a year on June 30 and December 31. Normally, the interest rate stated on the bond is based on the interest rate of bonds with equivalent terms of the State Treasury and the risk level of the enterprise.
However, we need to note that the interest rate paid on bonds is fixed annually but the value of the bond changes depending on market fluctuations.
- Floating rate bonds: during periods of economic volatility, interest rates on the capital market change continuously and therefore businesses often issue floating rate bonds.
Although it is called a floating interest rate, its interest rate actually depends on a number of important interest rate sources such as LIBOR (London Inter Bank Offered Rate) or the interest rate of this bond takes the interest rate of treasury bonds as a standard and is periodically adjusted after certain periods of time according to regulations.
Thus, the issuance of these bonds will attract investors in the conditions of an unstable economy and a constantly fluctuating financial market. These bonds are often suitable for investors who do not like to take risks, but this type of bond also has disadvantages such as businesses cannot distinguish the interest cost of bonds with certainty in budget planning and bond management also requires more time due to interest rate adjustments.
- Callable bonds: depending on their financial situation, some businesses can raise capital by issuing callable bonds, which means that the business can buy back the bonds at a certain time before maturity. In this case, the bond buyer does not earn the yield to maturity (YTM). Thus, callable bonds must be specified from the time of issuance so that bond buyers are aware, and the term and price when the business redeems the bonds must be clearly specified.
d. Borrowing capital from commercial banks
In the relationship between banks and customers, businesses (customers) and banks often have a prior agreement on credit limits. That is,
The bank will lend the business up to a certain limit without requiring collateral. Within this "limit", the business can borrow at any time without the bank needing to evaluate it. Similarly, within the credit "limit", the business can withdraw or spend money exceeding the balance in the account.
Credit limits are created by banks for businesses, usually these two levels are renegotiated once a year depending on the specific situation. This is a low-cost type of financing, but sometimes debt also causes problems such as financial crises, bank difficulties...
e. Leasing credit
Hire purchase credit is a form of credit financing through assets, machinery and equipment... Hire purchase credit is a long-term financing method with a long history and it has developed strongly in recent decades. In our country, hire purchase credit, except for a few familiar places such as airlines, is still in the research and testing stage.
- Methods of leasing credit transactions
A lease-purchase contract is a contract signed between two or more parties related to one or more assets in which the lessor (owner of the asset) transfers the asset to the lessee (user of the asset) for use for a certain period of time and the lessee must pay the owner of the asset a rental amount corresponding to the right to use. Lease-purchase credit has two main transaction methods: operating lease and financial lease.
- Operating lease
Operating lease has a long history, so it is also called traditional lease. In our country, this type of lease has existed in rural areas, where they lease land for cultivation for a few years or some establishments lease cars and other machinery and equipment.
Operating leases have two main characteristics:
+ The lease term is often very short compared to the entire useful life of the asset, and the contract termination condition only requires a short notice.
+ The tenant only has to pay the agreed rent, the lessor has to bear all operating costs of the property such as maintenance costs, insurance, property taxes... along with all risks of invisible depreciation of the property.
Thus, the operating lease form is completely suitable for seasonal activities, for example, when a construction company receives a large project requiring a large pile driver and they only need to use it for 9 months to 1 year, they do not need to buy it but rent it, which is more suitable.