Whether you’re dealing with a household grocery budget, a home mortgage, or end-of-year income tax calculations, financial matters can be confusing. However, keeping control of your finances is a vital aspect of managing your business, and once you decide to incorporate, simply keeping good records is not enough.
Appointing a Chief Financial Officer is among the first steps in creating a corporation, but even your CFO will most likely need expert advice when managing the company’s funds. If you are just getting started managing a corporation, you need to understand several basic truths about corporate finance.
Growth Is Not Optional
In order to remain profitable and provide value to its shareholders, a corporation must be in a constant state of growth. Before your company had investors, you only had to worry about yourself and your employees. However, for a corporation, there is more to success than turning a profit. Your business needs to expand its operations and market share in order to remain profitable over time and to continue to attract investors.
The key to dealing with inevitable growing pains is to get all your ducks in a row with your current market and product offerings before attempting to grow. For example, sort out any problems you have with your marketing strategy, human resources, quality control, and so on before attempting to branch out into new areas. Trying to grow before all aspects of your business are ready may cause your existing structures to collapse.
The Role of Acquisitions and Mergers
Growth can result from creating new product offerings, expanding your services, or branching out into a foreign market. However, not all business expansion is home-grown. You should also be on the lookout for worthwhile merger and acquisition opportunities. Acquiring another company can benefit your corporation in several ways. For example, a company with a business model and product offering similar to yours might add a global element to your brand without your company having to break into the new market on its own. On the other hand, a firm offering products and services complementary to yours can seamlessly add to your market share.
Although the benefits can be enormous, merging with or acquiring an existing business is not a simple procedure. In order for the merger to be successful, many factors come into play. When deciding whether or not to acquire another business, weigh all the pros and cons carefully, and remember to analyze the potential benefit to your investors.
Sometimes You Have to Divest
Divestiture may seem like a step backward for an organization with long-term growth in mind. However, remembering that long-term, not short-term, success is your ultimate goal may help you keep things in perspective. Sometimes a line of business needs to go away, either through bankruptcy and closure or through sale to another entity. Think of this process as pruning, and of your corporation as a large tree. You may have to let go of an acquired business because it seems to have no future, or because other, more profitable businesses in your realm of responsibility are taking up all of your company’s time and resources. In the long run, the best choice is the one that enhances profitability for your company and its shareholders — even if that means scaling back on certain ventures.
Never Stop Analyzing
A successful corporation is never finished growing and evolving. Periods of stability often alternate with periods of change, and you and your officers must keep up with changes in the corporate landscape, the economy, and trends in your primary lines of business. While you may decide to keep your eye on the day-to-day aspects of running the business, someone must be in charge of constantly analyzing your situation and the market in general so the company can be prepared for whatever comes its way.
If, for example, a new technology is emerging, your research and development team will need time to develop the kinds of products that will help you maintain an edge in the market. Whatever a company’s primary offerings are, Warren Stephens, CEO of the financial services firm Stephens, Inc., believes it is important that no business make a decision that could make or break its entire structure in one go. This underscores why continuous analysis of risk and of the market in general is essential when planning business activities.
Surround Yourself With Trusted Advisors
Even the most dedicated business person can’t do everything all the time; successful corporations rely on experts in the field of capital management, investment, and insurance, to name a few. In fact, having sufficient insurance plans in place is one of the best ways to mitigate corporate risk and protect your company and its shareholders. Liability is an issue for any form of business, but especially for product manufacturers and distributers. Finding professionals that you trust in all of these areas is a must.
As you can see, corporate finance involves more than just balancing a checkbook and paying bills on time. It involves growth strategy, management of multiple lines of business for maximum profitability, and insurance to protect the company’s existing assets.
Photo Credit: Eli Brown