An expert in corporate finance can help you make larger and smaller financial decisions for your company. In particular, there are four factors in corporate finance that everyone should keep in mind when doing any kind of analysis. These four factors are operating cash flow, invested capital, cost of capital, and return on invested capital.
Now let’s look at each of these factors
1. Operating Procedure
Operating cash flow reflects the actual cash flow a company generates as a result of its operations. If you ask professionals what makes up their company’s line of work, you’ll always get a variety of answers. For some, net income is the answer. For others, metrics like earnings before interest, taxes, depreciation, amortization (EBITDA), or operating cash flow do the trick. While each of these metrics is valuable and provides important information to us. They do not fully capture the economics of what is happening to a company’s operating flows. Net income as a measure reflects both cash and non-cash transactions, as well as interest costs associated with debt financing, and is, therefore, not an ideal measure of economic activity flows.
EBITDA is also not an ideal metric as it eliminates all depreciation and amortization costs. Although these costs can often indicate an economic decline in the viability of an asset. It also eliminates all taxes, even if existing taxes represent an economic output. Finally, cash flow from operations is also imperfect in that. It does not account for economic outcomes such as depreciation and certain types of depreciation. While including the impact of financial costs such as interest rates.
So, what should business professionals look at from an operational process perspective? To best capture the economics of what’s happening in a business? The answer is net operating profit after taxes or NOPAT. NOPAT is a measure derived from a company’s income statement but with some adjustments. Specifically, non-cash deductions in the income statement (e.g., expenses related to bad debt provision, LIFO provision, warranty provision, etc.) for NOPAT purposes. In addition, extraordinary non-cash losses are added up (non-cash gains are deducted), and any deferred tax reductions are added.
Finally, the results of the business are evaluated on an operating basis, before any interest expenses, so that the true operating cash flows of the business can be determined regardless of the source of debt/equity. It can be used. By applying NOPAT, a business professional will assess a company’s true economic performance unaffected by a particular financial strategy chosen by the company and reflect the cash flows available to both creditors and shareholders of the company.
2. Investment capital
Investment capital is the next essential element to consider in corporate finance. Just like the concept of operating cash flow, if professionals are asked what makes up a company’s capital, there will be many different answers. For some, total assets constitute the investment capital, while for others, it is the equity of the company. Unfortunately, both of these definitions of capital are flawed. Investment capital must include long-term investments that are expected to yield returns. Some of the funding for Total Assets comes from current non-interest-bearing liabilities, such as accounts payable and accrued debt. Therefore, using total assets to represent invested capital would overestimate a company’s level of capital investment. On the other hand, using equity to represent invested capital would underestimate a company’s invested capital.
A company’s assets are financed by both equity and any interest-bearing debt the company may have incurred. Therefore, equity and debt must be considered when determining the investment capital of a company. This definition of invested capital also matches our definition of operating cash flow. The NOPAT line represents the pre-investment capital flow available to both creditors and equity holders, while equity represents the financing provided to the business by the debt and equity holders themselves.
3. Capital expenditures
The third essential element of corporate finance is the cost of capital. The cost of capital is one of the most important, but also one of the least understood, concepts in corporate finance. Simply put, the cost of capital represents the minimum return required by the two main sources of capital: debt and equity. Debt and equity owners contribute capital to a company in the hope of earning a return commensurate with the risk that the debt and equity holders have assumed. Thus, a company’s cost of capital can be seen as the minimum ratio that must be met or even exceeded for a company that is believed to have created shareholder value.
The cost of capital is usually calculated by taking the after-tax cost of debt capital and the cost of equity and weighing these costs against the debt and equity ratio in the company’s capital structure. This calculation results in a weighted cost of capital known as the weighted average cost of capital. The weighted average cost of capital can be used to evaluate business continuity, capital budgeting opportunities, and acquisition opportunities by setting the minimum rate of return that must be earned.
4. Return on investment
The fourth essential element of corporate finance is the return on investment. Return on invested capital is calculated by taking the NOPAT for a given period and dividing that amount by the capital invested in place at the end of the previous period. For example, if a company’s NOPAT was $180 at the end of 2013 and the company’s invested capital was $1,000 at the end of 2012, the return on investment for 2013 would be $180/$1,000, or 18.0%.
Return on invested capital represents the profit a business has actually earned over a period of time, while the cost of capital represents the return that investors have claimed the business has earned. To the extent that the actual return on invested capital exceeds the required return, shareholder value has been created by the company. Actual returns exceed investors’ expectations. On the other hand, if the return is less than the cost of capital, the company has failed to meet the minimum expectations of investors, and shareholder value has been destroyed.
The ability of a company to consistently exceed the expectations of its investors’ cost of capital will ultimately determine the success or failure of the company.
Generating new revenue is a top priority for any business, but managing the money you already have is just as important. Having sufficient cash flow and access to capital allows a business to invest in new opportunities that will drive higher sales in the future.
Whether you’re updating your pricing strategy or need a temporary CFO, your business can benefit from the services of a corporate financial advisor. The right consultant has the skills to complement your team and provide actionable insights to get the job done in your business.
WHAT IS CORPORATE FINANCIAL CONSULTANCY?
A corporate financial advisor provides insider financial advice to companies with the primary goal of increasing shareholder value. This advice can take many different forms, from assistance in corporate merger and acquisition strategy to audit assistance.
Corporate finance professionals often have diverse backgrounds, with many studying finance for undergraduate degrees and MBAs. Many people start their careers by working with top financial firms and have a mix of consulting and operating experience.
Corporate finance consultants may work for a large corporation or operate as independent contractors. Increasingly, businesses are seeing the benefits of using independent corporate financial advisors rather than large corporations.
Freelance consultants have the specialized skills that companies look for but are often more cost-effective because they don’t have the overheads of a large firm. And since freelance consultants are often willing to work virtually, there are fewer travel costs to manage.
TYPES OF FINANCIAL CONSULTANTS
• Fire&A Consulting:
A financial consultant specializing in financial planning and analysis (FP&A) helps companies budget and forecast revenue, one of the skills companies need in this fastest-growing year, according to the BTG skills index 2021. They help business leaders assess how their working capital is best used and assess the overall financial health of the business.
• Financial control:
This type of consultation helps organizations evaluate the policies they use to allocate their financial resources. They do this by analyzing data, studying different operating scenarios, and making financial projections.
• Budget consulting:
Cash management is about optimizing cash flow and minimizing financial risks faced by a business. This type of consultant ensures that your business has sufficient cash flow for day-to-day operations while also developing a long-term cash strategy.
• Debt Management:
If your business is struggling with debt and struggling financially, a financial advisor can help. This type of consultant can help you understand your options and chart the best path forward.
• Risk management:
Consultants specializing in financial risk management help companies identify and mitigate the risks associated with their investments. Every investment has some degree of risk, but a risk management consultant can help you better understand the potential trade-offs.
WHY MUST RECRUIT CORPORATE FINANCIAL CONSULTANTS?
An expert in corporate finance can help you make larger and smaller financial decisions for your company. Let’s look at some of the ways a business financial advisor can help you.
FINANCIAL RISK ASSESSMENT
A business finance consultant can help you assess the current financial position of your business. They will look at the current risks your business faces and see how those risks might affect your business in the future. They can also build financial models and predict the future financial health of your business. This information will help you establish your business goals and objectives.
DETERMINATE NEW REVENUE LINES
By analyzing the performance of your business, a corporate finance consultant can help you identify opportunities to generate new revenue streams. These consultants understand consumer behavior and can recommend ways to expand your existing market.
This can be transaction-based revenue, recurring revenue, or revenue from services provided. They can also help you develop forecasting models for each type of revenue, helping you better manage your business cash flow.
Many businesses incur some type of debt, and the ability to manage that debt is critical. A corporate financial advisor can help you understand your options and restructure your debt to avoid bankruptcy. And if you must file for bankruptcy, a business financial advisor can help you create a plan to protect your assets.
HELP YOU ORIGINAL THROUGH EACH STAGE OF DEVELOPMENT
A corporate finance consultant can help clarify your business vision and provide you with a neutral perspective so you can navigate each new phase of growth. And they can give you a plan and the tools to execute it.
This person can also help you plan and manage events such as mergers and acquisitions, taking your business public, or arranging for the transfer of business ownership after you retire.