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Management of companies continues to strive to shift emphasis of reporting from a view of historical performance to a forward looking exercise which enables them to understand and grasp the companies’ prospects. In order to do this, there is a need for the company to have an accurate and reliable capital asset planning. Financial planning is extremely important and, therefore, there is a need to ensure that it is completed in the right way especially when it comes to the estimation of asset investment requirements for a corporation (Brown, 2006). The first step, when it comes to this process, is to create a study in order to be informed about the conditions of investment, and how much capital assets need to be invested. This step is important as it helps in the making of strategically sound decisions which consequently optimize the investment.
The second step is to understand the risk, and how to manage it; this includes the risk of the failure of the asset infrastructure. In this step, there is a need to take into account the possible impact of other factors such as climate change, which might detrimental to the physical assets. Thirdly, there is a need to calculate the amount of assets requirement in the specified project, this in turn will help the corporation to better plan its finances in a bid to raise the money specified in the survey.
Working capital management is the process aimed at managing current assets such as cash, inventories, debtors and cash equivalents in the short term financing. There are four principals used when it comes to management of working capital, firstly, there is cash management, which helps in identifying the cash balance which consequently allows a business to meet day to day expenses and reduce cash holding (Brown, 2006).
The second principal is inventory management; it often identifies the levels of inventory which is important when it comes to ensuring that there is uninterrupted production. It also minimizes reordering costs and consequently increases cash flow. Thirdly, there is a debtor management, in this principal, there is the identification of the credit policy, which attracts customers and has an impact in increasing the cash flow and there is the discount and allowances which implements appropriate credit scoring techniques and policies such as risk default. Lastly, there is short term financing, which identifies the appropriate source of financing, it often goes with the cash conversion cycle (Brown, 2006).
The first place to store excess cash is in government bonds. Government bonds are usually the most reliable types of bonds and are usually in the currency of the country that issues them. There is little credit risk, and for this reason, the government bonds referred to as risk-free bond. This is because an assumption is that the government can be able to raise taxes in order to redeem the bond upon maturity (Brown, 2006). The only problem with these bonds is that there is a currency risk which involves the fluctuation of the currency and inflation risk.
Secondly, there are corporations that invest their excess cash into the stock exchange market. They buy other company’s share which they have no conflict of interest in, and consequently reap profits when the companies that they have invested in make profits. This, however, is a risky investment venture because the success of the company depends on another company.
2. Debt financing refers to raising money through loans; the borrowing is from the bank, a credit institution or even from individuals. There is the use of collateral in this financing. Equity financing on the other can be described as founders money invested in the business, venture capital firms all in exchange for a portion of the business and consequently a share in the profits (Brown, 2006). Therefore, as seen from the definition, equity typically becomes a source of long term and general use of funds.
As a financial advisor, I will advise my client to strike a balance between equity financing and debt financing by weighing the costs as well as benefits of the two. Proper planning makes sure that one is not sticking the company into debt it cannot afford to pay as this will minimize the cost of capital and drag the company down (Brown, 2006). Equity financing focuses more on growth and in today’s economy; raising equity often means that one cannot borrow anymore. Therefore, when starting the business it is advisable to use debt financing, however; it should be done with precaution in order to ensure that the company has the ability to pay back within the set time frame.
3. Businesses slowly prefer using foreign investors because of their ability to pump in a lot of money into the company. Foreign investment in a company helps a company to grow exponentially and consequently helps in the prospects of growth anywhere in the world. Investors often aggressively seek returns from their money with minimal risks, and consequently this motive becomes colorblind and does not care for the form of government or religion.
Businesses often receive management, legal and accounting advice in order to keep the best practices which are practiced by their lenders. Further, because of the foreign investment, the companies can be able to incorporate the latest technology innovations in order to increase their efficiency and production capabilities (Brown, 2006). Therefore, this gives the business a competitive advantage in that it eliminates the effects of bribery, cronyism, and effects of politics.
However, just as there are advantages of foreign investors, there are also some disadvantages. Too much foreign control of a company might be detrimental in that the company might be forced to sell off unprofitable portions of a company which help in the maintenance of the corporate image locally. Further, the investor can borrow against the company’s collateral locally and further lend the funds back to the parent company. This, in turn, strips the company of its value without the addition of any capital (Brown, 2006).
4. Corporate bonds are bonds issued by companies in order to raise the capital; they represent the largest of bond markets. The risk of these bonds often depends on the financial stability as well as the performance of the company that issues the bonds. There is a need to assess the risk by checking the credit of the company with rating agencies (Brown, 2006). Common stocks, on the other hand, are offered in a public offering, and one becomes a shareholder in the company.
The risk of this stock depends on the direct performance of the company, if it makes profits then one reaps rewards, this is also the same case with losses. It is almost impossible to predict how the financial markets will perform and for this reason there is a need to diversify funds. This will ensure that if one financial instrument collapses the company does not go down because it has invested in other sectors of the economy. Different types of investment perform better in different market conditions. For example, during the 2008 housing crisis, the banking sector was almost at a near collapse and companies bond refused to mature as investment companies such as Lehman brothers went down.
Brown, C. (2006). The Little Book of Value Investing. New York: John Wiley & Sons.
Milton Friedman, the goal of a firm, has been extremely controversial. This is because he takes a shareholder approach when it comes to social responsibility. His approach views shareholders as being the economic engine of the organization and that they should be the only group to which the firm should be socially responsible (Colander, 1995). As such, it is important to note that the goal of the firm can, therefore, be said to maximize profits and to return a percentage of these profits to the shareholders as a reward for the risk that they decided to take when it came to investing in the firm. It is from this point that the shareholders can make a decision regarding the social initiatives that they want to engage in as compared to having an appointed executive do it for them.
Friedman in his arguments clearly stated that a company does not need to have social responsibility to the public or even the society and this is because the only concern that they have is to increase profits for themselves and the shareholders. It is the shareholders who in their individual private capacity that possess social responsibility (Ravi, 2013). He continued to further argue that if companies concern themselves with the community as compared to focusing on profits, it often leads to totalitarianism.
He categorically states that there is one and only social responsibility of any business and any firm and that is to use its resources in wise manner in engaging in activities which are designed to increase its profits so long as it is able to stay inside the rules of the sport, which is to say it can engage in an open as well as free competition without any fraud or deception (Wilcke, 2005).
However, the stockholder theory might not hold true in the 21st century and a fact it can be argued to be incongruous with the idea of corporate social responsibility at the cost of the individual stakeholders (Wilcke, 2005). For example, during a certain natural disaster, a company donating services or even goods to alleviate the natural disaster might in some way be considered not taking action in the best interest of the shareholder (Ravi, 2013). According to Friedman, it is the shareholders who should decide themselves on how much as well as whom to make donations. However, there are those that have stated that the goods which are often provided to the society in the time of need helps immensely to build a further allegiance by the society to the corporation. It also creates a good public image which in turns helps in attracting more customers to the organization.
Therefore, this goal does not apply to the current understanding of the role of the business firm in the society today (Ravi, 2013). This is because the concept of corporate social responsibility has matured enough, and, different business firms have come to understand its importance in generating more income and maintaining a public image.
This discussion is important and both the government and the society have a role in the expansion of Friedman discussion (Ravi, 2013). This is because in the sense of the word, they are all external stakeholders to a business firm and consequently, they should be given an opinion to talk about important aspects such as the main goal of a firm and the role that it should play in the society.
Colander, D. C (1995). Classic readings in economics. New Haven, VT: MaxiPress.
Wilcke, R. (2005). An appropriate ethical model for business and a critique of Milton Friedman's thesis. Human Resources Abstracts, 40, 1.)
Ravi, S. P. (2013). Does Stakeholder Perception of Firm’s Corporate Social Responsibility Affect Firm Performance?. International Journal of Asian Business and Information Management (ijabim), 4, 1, 67-83.
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