In the present paper, the purpose is to identify and analyze a series of specific corporate financial indicators, which are likely to affect my company, as well as, the markets that my organization is operating within. The analysis will be conducted in light of the opportunities they present. The trends will then be incorporated into an overall corporate financial strategy.
One of the macroeconomic trends that I noticed over the course of the semester is, despite the inclination towards equity financing, companies usually preserve a special place for debt financing. Another critical trend that I noted was that keeping excess cash in the company can potentially present immense harm to the performance not only in subtle but also distinct ways. The third striking trend related to sustainable revenue growth (Kaplan and Atkinson 27). I noted that it was not possible for an organization to achieve a faster revenue growth than the available resources can support. The ultimate trend that stood out for me was the pricing policy and pricing index. I noted that a good pricing strategy is all about maintaining an organization’s gross profit margin and that each enterprise has to operate at a given GP margin.
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Each of the trends listed above presents specified opportunities for an organization. Take an instance of the debt financing pattern. Foremost, as Dacis (par. 3) revealed in his study, where debt financing is used in the correct manner, a foundation for an enhanced return on assets is laid. To explain this, an example can be employed. Suppose an organization holds large cash balances rather than using a line of credit in an attempt to finance its current assets such as inventory. The cash balances might be earning an interest income of between 1 and 2 percent annually. If this organization decides to borrow at a lower rate than the return of the financed asset, after tax, this would be a prudent move. A further opportunity is that debt financing is const efficient when compared to equity financing. As such, as Dacis (par. 5) revealed, if an enterprise obtains a loan from the bank, the cost involved, in terms of annual interest expense, might be significantly high when compared to a same amount of equity. What makes equity financing more expensive is the high risk of equity ownership. Also serving as a core opportunity, debt financing, as opposed to equity financing, is readily available (Kaplan and Atkinson 29).
The excess cash trend also presents several key opportunities. One of these is that increase or a decrease in excess cash balance serves as a vital indicator of an organization’s well being. Secondly, where an incidence of insufficient working capital cash, as well as, decreasing cash generation is noted, it means that cash has to be accumulated. On top of this, as it was revealed by Dacis (par. 7), excess cash balances along with increasing cash generation signifies to the company that it needs to invest or distribute the surplus cash. Thus, it is apparent that an organization has to prioritize the issue of money balance.
As it was identified previously in this paper, a further trend noted was on sustainable revenue growth. This trend, as well, presents several opportunities. Foremost, sustainable revenue growth can potentially indicate to a company about how high revenues can potentially grow at a stipulated margin. Where a business endures faster growth than sustainable revenue, it necessarily means that resources, which are needed to finance such growth along with all other current operations, will run out. However, if the revenues grow at a slower rate when compared to the sustainable revenue limit, it signifies that an organization is heading to the right course. It implies that reservoirs will be built up. These reservoirs, in turn, will provide more resources over time to facilitate higher sustainable revenue growth. However, it is important to note that the situation cannot last for a long time, and if not managed well, there is a possibility that a business will become bankrupt.
The ultimate trend identified previously in this paper is on the pricing policy and the pricing index. One of the most significant opportunities is that it serves as an indicator of the company’s performance. Dacis (par. 10) revealed that, where the pricing index increases, the gross profit margin tends to increase, as well. The opposite is also true. Alternative explanation is that a higher pricing index means a high gross profit margin and subsequently, better cash flow for an organization.
Given the opportunities that each of the trends mentioned above presents, it would be appropriate to incorporate them into an organization’s corporate financial strategy. My company, just as before, will continue prioritizing equity as the source of operating funds (Kaplan and Atkinson 42). However, debt financing will also be sought appropriately. As such, my business will be pursuing debt financing whenever it holds significant cash balances that are earning a degree of interest return. My company will also maintain a reasonable level of excess cash balance. This balance will only be used during times in which my firm experience inadequate capital. My business will pursue a level of growth that will be supported by the existing resources. This necessarily means that the capacity of the current resources will be assessed and performance goals set according to these results. My company will seek for higher pricing index. This will stimulate an increase in the level of gross profit margin, which implies that better organizational cash flow will be recorded. Each of these key trends will be considered when developing my company’s financial model.
