Raising Finance?

Yes businesses do and indeed they have to. When talking about sustainability, foods concerns with humans’; then finance with the businesses’. These are all should be supporting each other so that they can build capacities to take advantages from the publics. I believe that quite a lot of sources of finance such as overdraft, bank loan, stock and bond (debt and equity finances) have been acknowledged by many commercials and most of them are taking those availabilities to obtain value and wealth maximisation. Perpetuity, however, cannot be established in this competitive era by only putting capital inside the company. You should consider also that it is entirely about long term strategic issues which may derive from accessing the management to know on how to twist their finances through effective and efficient systems. Up until this time, I realized number of approaches which businesses can attempt, in particular to raise their capital besides using the sources itself.

This is begin with the cost of finance (specified in International Accounting Standard 23) which is the inducement created by firms in the form of rate of return, given to parties once they grasp a financial security from them. Minimize overall cost of finance is one of the ways to do so. Company will want to recognize that the lower the better because it enable them to provide higher retained earnings to develop the business instead of giving shareholders personal wealth; however different perspectives appear when it comes to the shareholders; they want as much as returns to reward  their investments. Back to my first blog post, I also mentioned that shareholder wealth have to be maximised as to increase values. However since cost of capital can impact on organizations’ whole strategic choices, companies need to greatly show ‘good-balancing’ in apportioning them.  Some facts on the other hand justified that in order to reduce the cost of finance; debt will be dominating to be used as it will require certain level of interest and it is also tax deductible while equity finance is non-tax deductible and owners needs to pay high dividends on a part of their high profits.

In contrast, the second way that I want to discuss is by combining both raising finance through debt as well as equity because it will lead to cheaper yet effective finance in the end. I won’t agree if company use either only debt or equity finance or too many debts compared to equity although some organizations such as Europe Central Bank experienced net profit boost by over a third because of debt finance (bond issue).  Take Beazer Homes USA, Inc. as the case in point. They currently involved in a risk of bankruptcy because of high level of debt while in fact its market seems so charming these days.

Besides, Deutsche Annington Immobilien AG, largest residential business from Germany, reported by Fahmy & Callanan (2013) finally considered that equity finance is needed to help them paying off their €1 billion ($1.3 billion) debt this year. They therefore planned to issue commercial mortgage backed security (CMBS) so that finance can be raised and management may continue their IPO decision in the fourth quarter. You can see from here that debt cannot be the only reliance that companies have; moreover Deutsche Annington here created strategic choice to balance their equity and debt finance on which believed it can sustain their business progress. Based on the news as well, I found that any dividends are going to be paid by the company after their obligation to settle up the debt is fulfilled; thus it seems that business need to truly be cautious when increasing debt as it will cut the margins that the shareholders may receive as well as their value accordingly.

Another issue from cost of capital mentioned above is theory called WACC or Weighted Average Cost of Capital. To give further clarification, this overall cost of capital should be calculated by particular formula seen in this link http://macabacus.com/valuation/dcf/wacc. It will result to the greater amount of money (at this point is from investment return) obtained by the companies. As the motive is that sometimes cost of capital can be not strategically used causing the return is not as high as it is firstly bought, hence in order to cover it up, you should consider WACC allows businesses to take view on ‘worth’ projects. You will agree that it can finally raise finance, won’t you?

Last but not least, another thing that companies may have to consider is seeking for finance internationally in addition to the local debt and equity finance. Likewise Base Resources that I discussed on last week’s blog, they entered the UK market for this. Another example can be seen from UK electricity which is extending their effort to overhaul US and Europe’s. In my view, entering those marketplaces enable them to attract more investment players to outdo its isolated condition, and bringing better impacts for the business in long term period (if it is well-managed). To boost it up, UK electricity should make this strategy supported by smart tender offer to actually raise the most money as well as value for the business!