Corporate Finance
Corporate Finance
Our teams provide a broad array of advice on major aspects of corporate finance, the practical methods used and potential issues to encounter in the course of ensuring that funds are raised cost-effectively. The areas covered are summarized as follows:
Capital Structure
Capital structure refers to the combination of funding sources from various financing activities, including issuing shares to investors, and debt funding from lenders, and some may be the mixture of both debt and share issuance, such as convertible debt. Capital structure is extremely important, especially for a new startup company. As opposed to a more mature company, a common issue of a startup company is its access to debt financing is very limited and will usually be granted if the shareholder (or founder) personally guarantees the debt repayment. As the company grows into a more mature stage, with the presence of a growing asset base and an increase in profitability, debt borrowing will gradually become a viable option. It is important to understand the increase in profitability does not guarantee debt funding as the company also needs to demonstrate an ability to pay off loans. A profitable company with unstable or extremely variable cash flows implies a potential high liquidity risk, which also means it is not recommended for the company to commit a long series of loan payments. In other words, debt financing is not a viable option. Our team could assist management with addressing several issues that should be considered about capital structure, and which may lead to a different mix of funding sources.
Financial Planning
For any company which decided to take on any financing activities, we highly recommend the company first create a full annual budget, or if not, at least a cash forecast, to identify the timing of which the funding is needed and the amount of financing. A cash forecast is required for short-term financial planning and the annual budget provides a general view of an overall long-term outlook. We recommend both budget and cash flow forecasts in the financial planning process and therefore, they must be carefully developed and closely monitored on an ongoing basis. Financial planning via the two mechanisms mentioned is most necessary required to prevent unwanted surprises by the management due to sudden shortfall in funding, and some potentially lead to major operational disruptions or business bankruptcy in the worst-case scenario. Our scopes of service cover the development of a master budget and the compilation of the short-term and medium-term cash forecast.
Equity Funding
Equity funding is generally defined as fundraising via the selling of shares to investors. The types of investors the company could be targeting at is largely depending on the different phases of the company. For example, angel investors usually are targeted investors for new startups because this group of investors only invests at the “proof of concept” stages of a business. If the company is entering the phase of a growth path, a venture capital firm would be a suitable investor for the company targeted for funding purposes. A venture capitalist is more willing to invest a larger sum. Should the company continue to grow in size as well as increase profitability, other equity funding may include an initial public offering. We specialize in providing advisory on early-stage financing, the Initial Public Offering, and other capital-raising alternatives.
Debt Funding
Debt funding essentially refers to the funding of a business by lenders. There are a series of options available for debt financing including the line of credit, leasing, asset or inventory financing, bonds, long-term loans, and many more. Again, the viable debt funding option is dependent on the company’s profitability, size, and most importantly, the financial health of the company’s cash flow. Each of the debt funding alternations is catered for specific situations and it encompasses different lender requirements as well as financing costs. Our team could assist with assessing the company’s existing and future financials, providing advice on a different range of debt alternatives to assist management in making the right decision on debt financing.
Evaluation Tools
There are financing costs associated with the fund and this cost is known as the Cost of Capital. In financing terms, the cost of capital is the weighted average cost of debt and equity, collectively known as the Weighted Average Cost of Capital (“WACC”). The general principle is the business when seeking funding should always be making sure the return generated from the funding is the same or higher than the WACC. Any shortfall from WACC would mean the failure of the company to make good use of the funding and generate a negative return to the shareholders. Furthermore, evaluating the viability of a project targeted for funding also requires the assessment of its discounted cash flows. Investors and lenders make their funding decision largely based on the present value of the expected cash flows arising from the project in question. Surely there are other evaluation tools in this aspect and relevant parties including management, investors and lenders need these evaluation tools to make their decisions involving corporate financing. Our team is equipped with relevant expertise to assist management and/or from the investor’s perspective in providing them with relevant advisory on the concepts, development, and monitoring of these tools.
Uses of Funds
After the company has successfully obtained funding via equity or debt funding or a mix of the two, managers of the company are required to allocate the available funds carefully to different needs, and by the cash flow forecast as mentioned in the preceding topic, attributable to the limited available funds. The objective is to maximize the possible return from the allocated funds of which the return should be at least at the same rate or higher than the weighted average cost of capital.
In achieving this objective, not only managers must first be trained with mindful of the limited supply of cash to support different needs, but also managers are required to conduct a series of analyses on the use of funds. Funds are commonly deployed for different purposes including meeting the working capital needs, capital expenditures, investment, dividends, and other payout options such as shares buyback, stock dividend programs, and mergers and acquisitions.
• Working Capital Management. A significant amount of available funds may be utilized to support the working capital needs. Unfortunately, despite the large sum of funds being apportioned in this aspect, most companies lack the relevant practices or initiatives in monitoring the funds invested in this area, especially on reasons why they are changes in working capital. As a result, our experience indicates a high degree of inconsistency in working capital which in most cases resulted in an unexpected surge in funding needs to support the high level of variability. Our team could assist with introducing several enhancements in the aspect of working capital management that could potentially reduce the funding needs.
• Capital Expenditures. Before investing the limited funds in fixed assets acquisition to support its existing or new business activities, management is highly recommended to conduct a series of analyses to fully understand the benefits, risks, and relevant costs involved in the prospective purchase decision. The relevant analysis includes costs and benefits analysis, impact assessment on capacity levels of the target purchase, and many more. Our team could work closely with management to identify the relevant issues and assist with developing the relevant analysis when deciding whether to proceed with the prospective fixed assets purchase.
• Investment Alternatives. After apportioning the funds to meet different needs, a company may have occasional cash remaining in the cash reserve. Some companies which have successfully deployed the invested funds which generate high cash returns may confront substantial cash surges. At this point, a company must invest the cash reserves in highly secured investment instruments to maximize its return on idle cash. We could assist with designing a system for investing cash. This system of investing the cash reserve will operate within restriction limits to engage in relevant investments while protecting the cash and making it readily accessible. Our team could further share with management certain guidance on investment, how to deal with different cash availability scenarios, investment strategies and relevant instruments, and many more.
• Dividends Payout. When the Board of Directors is considering distributing the available funds to investors (or shareholders) via dividends, there is a broad array of considerations to be taken into account. These considerations do not involve extensive analysis or specific formula but rather the Board of Directors usually makes the decision based on the type of investors who hold shares of the company and whether the funds can be put to better use than dividend distribution. Our team could assist with advising the Board on areas of consideration from the perspective of both the investors and the company, and how these considerations are weighed in the decision on dividend payout. Furthermore, we could further advise on share buyback options and stock dividends, which represent the alternative options to dividend payout.
• Mergers and Acquisitions. Mergers and acquisitions refer to the initiatives and actions of one company, known as the acquirer, in acquiring another business, known as the acquiree. The deployment of funds in this area is usually very substantial and it is an extremely risky decision as well as involves a highly complex process. There are a broad array of factors causing project failure, but the common factors contributing to a significant loss of funds due to project failure are the lack of proper valuation of the target company and the acquirer’s failure to develop and adhere to a properly planned mergers and acquisitions strategy. Our Mergers and Acquisitions team specializes in this exercise, ranging from examining the different acquisition strategies, and valuation of the target company to executing the strategies, terms negotiation, consideration payment, and identifying integration synergies. For more of our scopes of service provision, please refer to Mergers and Acquisitions.
Risk Management
As outlined in the preceding topics, there are a series of risks in most corporate finance activities, ranging from financial planning, and equity and debt funding to different methods of use of funds. Furthermore, businesses that did not engage in aforesaid activities, will also be exposed to other corporate financial risks such as foreign exchange and interest rate risk. A business that engages in a large volume of foreign currency transactions will potentially be exposed to adverse currency exchange rate positions which may result in significant losses. Similar, to businesses that have taken a significant amount of debt, any sudden surge in interest rate will expose the company to significant financial losses. In this connection, a company must mitigate these risks via various payment methods, futures contracts, forward contracts, options, interest rate swaps, and other alternatives. Some of these alternatives may be highly complex. We could assist with advising management on the relevant techniques associated with Foreign Exchange Risk Management and Interest Rate Risk Management. For more of our service provisions in managing foreign exchange exposure risk and interest rate risk, please refer to Corporate Risk Management.
Metrics
The key to supporting a corporate finance function and its related activities is a well-designed system that will not only closely monitor the relevant activities on an ongoing basis, but more importantly determine how well it is functioning and whether there is an early sign of risks. This system encompasses the deployment of a series of measurements in multiple aspects such as cash usage monitoring, cash forecasting, solvency, and most important of all, key measurements in association with the cash conversion cycle. Cash conversion cycle-related measurements track the duration between cash invested for a specific business transaction and cash receipt generated from the invested transaction. For example, if a company is principally engaged in manufacturing activities, cash conversion cycle measurements track the time that it requires to pay cash for raw material, converting materials to finished goods, followed by selling these inventories and eventually receiving payments from customers. Our team could assist with recommending relevant key measurements which support the corporate finance function.
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