Financial Management and Corporate Funding Strategies
Financial Service Company Operations
For a company to begin, it must have resources, including human resources. To utilize these, they must pay a price; the company has to consider how to pay, i.e., how to finance them. Once this is achieved, the company will need money to pay employees and raw material premiums, so it needs to continually finance itself.
Core Financial Functions
- Financial planning: What are the future capital needs? What funding will be needed for the next investment to undertake?
- Investment decisions: What is the best use of financial resources? What are the most profitable investment projects for the company?
- Obtaining funding: What is the best way to achieve them? They will have to evaluate the available alternatives.
- Control of financial balance: What level of indebtedness is convenient? Does the business have the solvency to pay its debts?
Complementarity Between Funding and Investment
Two aspects stand out:
- The analysis and selection of company investments.
- The analysis of the various possibilities of obtaining the financial resources that the company needs.
Both aspects are related, since the decision to invest in a possible project presupposes the need to decide how to fund this project. Therefore, the financial function is the point of contact between the application and the obtaining of financial resources.
Classification of Funding Sources
Funding sources are divided into:
1. According to the Ownership of Resources
- Self-financing: This consists of financial resources owned by the company. It is formed by the capital contributed by the partners or owners, both at the time of the initial constitution and in subsequent extensions. It also includes reserves or retained earnings (annually, benefits that are not distributed among partners remain in the company to cover their financial needs as reserves).
- External financing: This includes all financial resources generated by debt or obligations for the company. These resources come from creditors and financial institutions; therefore, they are resources that must be repaid over a period of time.
2. According to Residence Time
- Long-term financial resources: These are permanent capital resources. Sources include members' contributions, loans, borrowings, or other forms of long-term debt, as well as company reserves. All these resources share a stable and sustainable character.
- Short-term financial resources: These resources come from suppliers, loans, and bank credits.
3. According to Their Source
- Domestic financing: This is generated within the company through its own savings.
- External financing: This comes from outside the company, such as resources from others, excluding self-financing.