In India, it is famously said that the Goddess Saraswati and Goddess Lakshmi don’t go together. Those who have knowledge of producing complex products don’t have money and those who have money don’t have the technical knowledge to produce profitable products. These two competencies need to come together and create an ecosystem. For the technical people, it is not only about not having money but there is a lot in terms of not being able to understand the world of finance. In case of the people who have money and who understand the world of finance, the knowledge of production processes and the knowledge of markets is typically poor. Hence, merger and acquisition which brings together one financial person and one technical person creates a very potent force. They should have the working knowledge of each others departments but they should take precautions that unwarranted, unwanted, unnecessary and destructive interference is not created. The financial promoter of a company should stick to his role of financial management.
Ways of adding company wealth by financing management
In the way of operational director generates wealth for a company through production of goods and services, financial director can also create a wealth over and above the operational wealth. And this should be the main focus of the director finance in our company. Following are the three areas of work in which financial wealth of a company can be increased by the financial management without any involvement of the operations people:
A business is all about making more money, and especially more about with the others’ money without suffering from limitation of once on financial networth. The market is full of 800 billion customers and there are huge number of business opportunities. To reach the final product or service to the final customer, it requires complex and long value chain. It is very difficult to have control over the products market and the value chains but yet, the business environment keeps on throwing in front many new business opportunities.
For Small and medium enterprises, they notice there are lot many business opportunities around them in the areas of their own business activity or in the areas similar to their business activity. Mostly they wish to tap that opportunity, but typically they don’t. What is the reason? The most profusely cited reason is lack of capital and not lack of technical competence (and also not ability to take risk of market.).
Financing role of financial director:
It is not only the new opportunities, but also the existing business operations require external capital from time to time. The basic function of the director finance of a company is to be able to raise all this capital. The financial promoter of the company is expected to know the various kinds of investors and their investment preferences. He must be networked with the investor world and he should be knowing which investors invest in the pink of the company which investors can invest in the most difficult times of the company. He should have the financial projections of the company ready with him which should include the requirements of all the departments. He should have the list of possible risk events of the company. He should have built the various scenarios and the various courses to avail capital in those kind of times.
After ensuring that there is adequate capital available, the next work in the direction of increasing companies wealth, is to reduce the cost of capital from the perspective of the existing shareholders. The first activity in this direction is to to understand what is the optimum capital structure for a company. Capital structure means the various components in the capital, their ratio and future trends in these ratios. Following are the ways of reducing the cost of capital:
Lower rate of interest on all types of loans and dead securities issued by the company
Lower or no requirement of mortgage
Better credit rating
Optimum level of financial leverage
Lower damages and penalties in the contract
Favorable T&C in the financial contract
Disbursal of the amount and start of payment of the interest only when money is required
Safe Debt service coverage ratio
Lesser requirement of personal guarantees
Lesser requirement of Corporate guarantees
Room for enhanced credit
Lower proportion of unstructured high interest rate loan
Lower dividend rate for preference shares
Prefer the capital in which return or interest can be treated as an expense and lower tax has to be paid
Carry out early redemption if internal funds are lying idle
Transfer the loan to a new bank with lower interest rate
Refinance the loan when the project is completed and risk of business is substantially reduced
So long as possible, lower tenure of a loan
Reduce the risk perception of the company in the eyes of the investor
Charge higher premium for the new equity participants
For the same amount of capital raised, the cost of raising capital is different. Whether it is cost of capital or whether it is cost of raising capital, finally it has to be borne by the business. Following are the ways and means to reduce the cost of raising capital:
Avoid or reduce the bank loan processing charges
Reduce the amount of MCA fees for issue of new equity capital
Reduce the amount of stamp duty for the issue of new equity capital
Reduce statutory, compliance charges
Reduce the certified professionals’ fees (company secretaries and Chartered Accountants)
Reduce the fees payable to the valuation experts
Reduce the fees payable to the certified valuers
Reduce the fees payable to the merger and acquisition consultants, strategic consultants like Apohan (us).
Reduce the fees payable to the brokers
Reduce the fees payable to the investment bankers
On the Similar lines as raising capital, make investment off the excess business money. Following are the ways to do this:
Get higher rate of return
Get fire interest rate
Reduce the cost of investing
Invest the maximum amount possible
Keep in mind the importance of liquidity
Seek higher amount of security from the borrower
To have maximum number of flexibilities in the contract for you
So what is the learning?
It is not only the operations but also the finance department who can contribute to the wealth of the company. The extent of increase in wealth by financial optimisations might be lesser compare to the operational contribution. But many times marginal differences make a lot of difference.
Suppose you started a business with rupees 400 of which 200 is a bank loan. Suppose your revenue is rupees 500 with 10% net profit. Assume that your loan repayment is equal to depreciation in the books of accounts. You have generated rupees 50 of an additional business wealth through operations for that year. If you are able to save 0.25% financing cost of the outstanding loan by all means, you will make rupees 5. This is 10% increase in your profit when financing was not done in a good way.
Role of Apohan:
Apohan is an expert company in Strategic financial advisory. You can rely on it for its skills in raising adequate finance at the lowest cost, negotiating the best terms of contract & ensuring full confidence of repayment without any default.