The corporate finance principles work as a guideline for the corporate to ensure better application of finance. This helps to ensure the smooth business operation and also to maximize the return of the stockholders. The task of corporate finance is mainly related to financing, investment, and dividend payment. And a better and safe financial decision is followed by the core principles of corporate finance. There is a similarity between the principles of finance and corporate finance.
Principles of Corporate Finance
There are 8 principles of corporate finance that every corporate finance manager should know before taking a financial decision. So that corporate can get the most out of the available monetary resources. The principles are:
- Financing Principle
- Investment Principle
- Principles of Dividend Payment
- Principles of Stockholders Value Maximization
- Principles of Risk & return
- Profitability & Liquidity Optimization Principle
- Principles of Working Capital Management
- Internal Control Principle
Financing is one of the crucial tasks of a corporate finance manager. A better financing decision will lead you to low-cost financing which optimizes funds flow. This principle guides a manager to evaluate all the available alternatives to ensure the minimization of the cost of capital with an optimal risk.
The main guidelines provided by the investment principle is to invest where there is a maximum amount of return at an optimal amount of risk. Although investment behavior changes based on the individual risk-taking nature. Always keep in mind that the higher the risk higher the expected rates of return. If you are going for long term investment for your business, then you must do capital budgeting to prioritize the selection of products.
Principles of Dividend Payment
Every corporate continues its business operation for the intention of making money. Money comes from different sources of funds, it can be debt or it can be equity fund. The thing is whenever equity fund is collected from the investors, they expect a return from that monetary contribution. To repay their expectation is made by paying dividends. Corporate finance needs to be careful while declaring dividends for the stockholder. The amount of dividend depends on the leftover amount after retaining money as retained earnings. Ensure a good dividend by implementing the right financial planning.
Principles of Stockholders Value Maximization
One of the main tasks of corporate finance is to ensure the value maximization of stockholder’s equity. The more value a manager will create the less agency conflict will be there. Sometimes the success of a corporate finance manager depends on the value maximization of the organization. So if a finance manager follows this principle then there will be less conflict among management and the owners and company will be a financially strong company.
Principles of Risk & Return
There is a direct relationship between risk and return. The expectation of return will be higher when there is a high risk associated with the investment and vice versa. So before investment, it is required to ensure a balance between risk and return. So that company will do better in the long run. The target is to maximization of return by taking the optimal amount of risk.
Profitability & Liquidity Optimization Principle
Retaining the right amount of cash or cash equivalent on hand is not an easy job but corporate finance provides a guideline on how you can ensure the right amount of liquid fund to continue uninterrupted services. Another thing is while maintaining the required amount of funds as a liquid asset it must be needed to consider profitability also. As the surplus amount holding on hand will not generate any revenue so proper planning is necessary to optimize profitability and liquidity.
Principles of Working Capital Management
To continue uninterrupted business services on a regular basis it is required to provide enough funds to the related parties. Managing working capital is one of the tough jobs of corporate managers as it required good planning of cash inflow and outflow. It can be managed from the long-term financing sources or short term sources.
Internal Control Principle
Internal control works as a success factor in corporate finance. The more internal control exists in your organization the less mismanagement of recording and management of funds will be there. A better internal control actually helps to increase the efficiency in the different field of an organization. If a corporate finance manager works for the management of the internal control system, then the overall functionality and proper use of financial assets will be ensured.