Essence of the enterprise finance and connections to the firm’s goal
The essence of finance is manifested in its functions, namely: distributive and controlling. Distributive function of finance signifies its involvement in distribution and redistribution of GNP and of national income. Controlling means that finance is involved in the control of effective use of all kinds of economic resources.
Efficient financial management requires the existence of some objective or goal because judgment as to whether or not a financial decision is efficient must be made in light of some standard.
Various objectives have been recommended. The most important are profit maximization, value creation, the management's and the shareholders' goals, the social responsibility of the firm.
Goals of the firm:
Financial decisions at the enterprise
Any enterprise, even the situation where is (in the development activity phase or in the maintaining of the production capacity) needed to attract the resources for the developed activities financing. The substantiation of the enterprise financing decision have supposed the following aspect analyses: the period on the financing sources are needed, the financing sources cost, the financing contract flexibility, the taxation impact on the enterprise financing policy, the agent costs but and the information asymmetry problem.
The enterprise ability to evaluate both their products value and its costumer’s value in terms of their contribution to enterprise value increasing is peremptorily needed for long term
assuring of competitiveness and success.
But, how in the present the information volume, complexity and value from these processes are continuously increasing, there is very difficult to evaluate the enterprise performance.
Usually, to the enterprise performance evaluation is using many financial indicators that are well-knew: the discounted net present value, the economic added, the profitability ratio, the liquidity ratio, long term solvency ratio etc.
But the financial decision have an important role in the obtaining the favorable values for these indicators.
The financial decisions that can be taken by the business administration are grouped in two
categories:
ƒ the investment decision or dez-investment, that is referred to the constituting and administration of the assets portfolio;
ƒ the financing decision, that is referred to the financial structure of the enterprise, respectively to the manner of the resources constituting.
The financing decision makes possible the investment decision. If in the neoclassical approach of the international financial management theory, the financing decision don’t add value to the enterprise, in the variant of an imperfect market existence of the same theory, there is argued that there is the possibility to create additional value for the enterprise through the financing decision, the manner in which the funds are obtained and the other support decisions.
There are many factors that are influencing the enterprise financing decision. The relative importance of these factors varies from an enterprise to another at a given moment and for an enterprise lengthways, but for an enterprise that has planned obtaining of a capital, taking into account of the following particularities is needed:
a. the target capital structure. Generally, the enterprises have established the target capital structures. Thus, to the taking of any financing decision is followed the comparisons between the actual capital structure and target structure;
b. the concordance between liabilities maturity and assets maturity. This factor has a larger influence on the type of used debt: for example, for exploitation needs on short term are contracted the short term loans and for the acquisition of the fixed assets are contracted the loans on medium and long term;
c. the level of the interest rate. To the making of the financing decision, the financial managers have take into account the interest rates levels, both absolutely and relatively, on the short term and on the medium and long term. When the interest rates on the long term are too higher, the managers are avoiding an issue of securities on the long term that will fix those higher costs for long periods of time. A solution for this problem is using of the long term loans with cancellation clause. The enterprises are based in their financing decisions on the anticipations related to the future interest rates;
d. the present and predicted conditions of the enterprise. If the present financial situation of the enterprise is mediocre, the managers can avoid to issue of securities on long term because, the long term debts issued when an enterprise has a mediocre financial situation, have a higher cost and is supposed on the sever restricted conditions then the debts issued in a good financial situation. Thus, an enterprise with a weak situation but that has predicted a good situation in the futures will decide to postpone the permanent financing until to the situation improvement. An enterprise with a good situation, but that have predicted a bad potential situation in the next period, has motives to finance now the activity on long term then wait;
e. the restriction in the existent leverage contracts. There are situation when the enterprises are restricted in issue of new primary mortgage redeemable stock by the issue contracts provisions related to debts covering. Also, the current ratio, leverage rate etc. are able to restrict the capacity of an enterprise of using different types of financing at the given moment;
f. the guarantee availability. Generally, the guaranteed debts on long term are more little expensive then un-guaranteed debts. Thus, the enterprises that have many fixed assets for general and specialty using with an established reseller value can use a higher value of the debts, especially mortgage redeemable stocks. More than that, each annually financing decision is influenced by the quantity of new fixed assets bought and available as guarantee for new redeemable stocks.
3)Financial environment
The financial environment
A healthy economy depends heavily on efficient transfer of funds from savers to individuals, businesses, and governments who need capital.
Most transfers occur through specialized financial institutions which serve as intermediaries between suppliers and users of funds
It is in the financial markets that entities demanding funds are brought together with those having surplus of funds.
Financial markets provide a mechanism through which the financial manager may obtain funds from a wide range of sources, including financial institutions.
The financial markets are composed of money markets and capital markets.
Money markets are the markets for short-term (less than one year) debt securities.
Examples of money market securities include Treasury bills, bankers' acceptances, commercial paper, and negotiable certificates of deposit issued by government, business, and financial institutions.
Capital markets are the markets for long-term debt and corporate stock.
In addition, securities are traded through thousands of brokers and dealers on the over-the-counter market, a term used to denote all buying and selling activities that do not take place on an organized stock exchange.
4. Methods of payment - letter of credit, open account
Letters of credit
A letter of credit adds a bank's promise of paying the exporter to that of the foreign buyer when the exporter has complied with all the terms and conditions of the letter of credit. The foreign buyer applies for issuance of a letter of credit to the exporter and therefore is called the applicant; the exporter is called the beneficiary.
Payment under a documentary letter of credit is based on documents, not on the terms of sale or the condition of the goods sold. Before payment, the bank responsible for making payment verifies that all documents are exactly as required by the letter of credit. When they are not as required, a discrepancy exists, which must be cured before payment can be made. Thus, the full compliance of documents with those specified in the letter of credit is mandatory.
Often a letter of credit issued by a foreign bank is confirmed by a local bank. This means that the local bank, which is the confirming bank, adds its promise to pay to that of the foreign, or issuing, bank. Letters of credit that are not confirmed are advised through a local bank and are called advised letters of credit.
Any change made to a letter of credit after it has been issued is called an amendment. The fees charged by the banks involved in amending the letter of credit may be paid by either the buyer, but who is to pay which charges should be specified in the letter of credit. Since changes can be time-consuming and expensive, every effort should be made to get the letter of credit right the first time.
Open account
In a foreign transaction, an open account is a convenient method of payment and may be satisfactory if the buyer is well established, has demonstrated a long and favorable payment record, or has been thoroughly checked for creditworthiness. Under open account, the exporter simply bills the customer, who is expected to pay under agreed terms at a future date. Some of the largest firms abroad make purchases only on open account. Open account sales do pose risks, however. The absence of documents and banking channels may make legal enforcement of claims difficult to pursue. The exporter may have to pursue collection abroad, which can be difficult and costly. Also, receivables may be harder to finance, since drafts or other evidence of indebtedness are unavailable.
Before issuing a pro forma invoice to a buyer, exporters contemplating a sale on open account terms should thoroughly examine the political, economic, and commercial risks and consult with their bankers if financing will be needed for the transaction
5)Methods of payment - documentary collection or draft
Documentary letter of credit and drafts
The buyer may be concerned that the goods may not be sent if the payment is made in advance. To protect the interests of both buyer and seller, documentary letters of credit or drafts are often used. Under these two methods, documents are required to be presented before payment is made. Both letters of credit and drafts may be paid immediately, at sight, or at a later date. Drafts that are to be paid when presented for payment are called sight drafts. Drafts that are to be paid at a later date, which is often after the buyer receives the goods, are called time drafts or date drafts.
Since payment under these two methods is made on the basis of documents, all terms of sale should be clearly specified. For example, "net 30 days" should be specified as "net 30 days from acceptance" or "net 30 days from date of bill of lading" to avoid confusion and delay of payment. Likewise, the currency of payment should be specified as "US$XXX" if payment is to be made in U.S. dollars. International bankers can offer other suggestions to help.
Banks charge fees - usually a small percentage of the amount of payment - for handling letters of credit and less for handling drafts. If fees charged by both the foreign and local banks for their collection services are to be charged to the account of the buyer, this point should be explicitly stated in all quotations and on all drafts.
A draft, sometimes also called a bill of exchange, is analogous to a foreign buyer's check. Like checks used in domestic commerce, drafts sometimes carry the risk that they will be dishonored.