The necessity of finance
What are your first impressions when you hear the word “finance”?
“Financial managers learn to improve their professional skills.”There are a lot of complicated calculations, and NPV, IRR, that are hard to understand”There are a lot of complicated calculations, and NPV, IRR, that are hard to understand”The bar is too high for liberal arts students.” Indeed, much of the general public feels that way, which is probably a daunting area for many.
On the other hand, business people who are not directly involved in finance or finance-related departments also have a strong desire to learn finance.
In other words, despite the image of sophistication, finance is still seen by many as essential to the future of business.
The reasons for this background are varied.
For example, various large enterprises have guided the company system, so that the enterprise organization gradually molds. As a result, businesses handled by a financially literate group of people began to be distributed to others in the progressive organization. While you don’t need to be an expert to take this business, you need to have a general understanding of it.
In addition, a sense of finance is so closely related to making business decisions that it is a must for both managers and management candidates.
If you understand finance, not only those responsible for finance, but also others can benefit greatly from it. First is interested in economic news, such as can be keenly aware of Toyota’s mode of production in addition to improving the production efficiency and other targets, or with their logic to understand the big companies such as Panasonic or SONY’s business strategy and business operation policy, or from the cast money for mergers and acquisitions and mergers and acquisitions enterprise of anti-takeover strategy experience to stimulate competition Segment.From a financial perspective, you will find that the seemingly mundane announcements of the company are closely related to the strategy of the company.
How to Do “Efficient business”
1.1. Think about the ratio of liabilities to equity.Equity funding costs are higher than borrowing costs.
The biggest difference in borrowing is the cost of funding. The easy cost of borrowing is cheaper than raising equity investments. The reason is that lending is less risky than investing in stocks.On the other hand, Stockholders have to bear more risk, so they demand more expected returns.
The expected return of investors is the cost of capital for operators.
The cost of borrowing is to pay interest, while the cost of raising a stock investment is dividend plus stock appreciation (capital gains). For business operators, financing that requires regular repayment of principal is difficult to avoid, and they may find equity investment more beneficial. The inconvenience of borrowing is real. Sometimes it’s hard to return it all at once, or it can be a real dilemma if you do. But financing has the advantage of having a lower cost of capital than equity investments, as long as there is no problem with fiscal restructuring. Although there is no fixed return date, shareholders (stockholders) often demand higher enterprise value.
In addition, stock investing involves company ownership. In principle, all the remaining returns of the company belong to Stockholders, so Stockholders will actively demand higher corporate returns. The higher the enterprise value, the higher the stock price, and there is no upper limit (of course, there may be unexpected risks that the stock price will go to zero).But that’s all raw stuff. It is only necessary to raise funds based on the nature of the business.
If you’re in a stable cash-flow business, it’s better to borrow as cheaply as possible. On the other hand, if a company has a high risk of return and unpredictable cash in the future, it isn’t easy to get much money from creditors. Therefore, even if the cost of capital is high, it can only be raised through stock investment.
All in all, we need to consider the enterprise’s cash flow is stable, or the amount size and business life cycle is difficult to forecast, the benefits of deviation degree (business risk), and the cost of capital, according to the actual thinking is suitable for loan or stock investment, and keep the financing balance of the two, which is the financial director of the most important responsibility.
2. Controlling leverage is very important
Financial officers must properly control capital leverage. Here we will further analyze the nature of capital leverage.
Leverage means leverage. This is a metaphor for expanding a larger business by investing as little as possible in stocks. When things go well, Stockholders gain more, but lose more if they lose money. The closer the interest rate of financing is to 0, the closer the expansion of profit or loss is to the multiplier of capital leverage.
Assuming the same amount of earnings and ignoring interest rates, ten times leverage will yield ten times more payments per share than one times leverage.
The losses and gains are fierce and can be scary. Especially for shareholders, the impact is greater.
Think about risk, return and leverage simultaneously
On the other hand, safe but low-margin businesses can hardly generate returns that appeal to shareholders without leveraging capital. If you have a company with a steady income of 2 percent, you can increase your earnings per share by 10 percent by leveraging your moneyl.
However, in a business that may incur huge losses in the event of an accident, it is very dangerous to keep capital leverage at a high level (a failure may bankrupt the company). Therefore, when capital leverage is high, enterprises will naturally reduceit to achieve stable operation.
The ratio of enterprise risk and capital leverage is determined by the balance of risk and return. In addition, the financial officer must make his own decision.
Finance is diverse.We should see through the essence of enterprise value from the perspective of finance.The field of finance is often thought of as the domain of some internal experts or external experts. This view is true, but if finance is “the art of risk and reward,” then financial knowledge is useful to all business people and everyone. I hope we can live in the daily work, and with their own characteristics to work hard, increase the practical application, and finally make it into perfect art. Finance becomes your weapon and your arm.
