The financial decision of The Company

Our understanding of the financial world is embedded in the Theory of Finance, therefore, deep knowledge is a necessary condition to make good financial decisions. The study of finance is essentially a search for theories that provide a better understanding of the financial aspects of the company.

Under the name of Finance can find at least three approaches. Each of which refers to the same set of operations and transactions, but analyzed from different points of view.

A. The Corporate or Business Finance: the approach developed so far, as it analyzes the company's finances from the perspective of the director or chief financial officer, is, by and for itself. Analysis focuses on how companies can create value and maintain it through the efficient use of financial resources. Within this approach there are three major components exemplified in Figure 1.



1) The decisions of investment, which focus on the analysis of the acquisition or replacement of the real assets of the company. These can be tangible and intangible assets such as machinery, equipment, infrastructure, trade marks, patents, etc.. In which the company must invest to meet the targets.

2) The financing decisions that analyze the different alternatives for obtaining the funds necessary to finance the operations of the company mentioned in point a). In this analysis, the chief financial officer, evaluated the possibility of a bank loan, issuing new shares in the case of a publicly traded company, a leasing contract in the case of capital lease or deferred payment company's suppliers (trade credit), among others.

3) The managerial decisions, which are basically concentrated on the analysis of the systematic procedures that govern financial and operating decisions of everyday life, for example, treasury management (box), inventory management and stock products, the volume and turnover of customer credit or accounts receivable, staff salaries, among others.



As shown in Figure 1, a company requires for its normal operative countless tangible and intangible real assets (machinery, equipment, infrastructure, trade marks, patents, etc..) That are used for the production of goods and services catering your target market.

These acquisitions involve a disbursement or outlay by the company (line A), and to the extent that these investments are incorporated into the operations of the same, it will increase or generate a stream of revenues or profits (line B).

Having made the investment decision, the CFO should review the various alternative forms of finance such acquisitions. In general, businesses have basically two choices: turn to equity through the application of profits or earnings (line D), commonly referred to this source of funding and internal. Or use funds from the various tools available in the financial market (line C), in which case it generates for the company, in the future, an outflow of funds in interest and / or dividends (line E). In this case, the company would be using an external funding source.

The basic problems facing any director, officer or chief financial officer are:

1 - How much should you invest in the company and which assets should do?

2 - How should raise the necessary funds for such investments?

The first question is answered from the Economic Dimension of the Company. The appropriate level for analysis are the techniques for evaluating investment projects or capital budget.

The second question is answered from the financial dimension of the Company. His analysis is performed in what is called the funding decisions.