Keeping corporate finance service in order is an important task for any business. Although this phrase is a basic premise in the organizational environment, making a thorough projection with consistent data and uniting it in a way that allows for complete analysis is not simple.
Service companies, for example, deal with an intangible “product”. This makes the financial calculations quite different from a product industry. This creates the need for the services of a knowledgeable professional about corporate finance, from its concept to the way financial health measurements are made. In addition, it provides data and tips that help maintain the sustainability of the venture.
In this article, we will help you understand the Corporate Finance Services in UAE of your business. In addition, we will give you instructions to offer services related to them to your customers. So check it out!
What are corporate finance?
For many people the emergence of business would have occurred at the birth of modern capitalism in the mid-sixteenth century. However, business history began well before, being a medieval creation. Since then, corporate finance is part of the daily life of entrepreneurs and employees. But after all, how can we define this term?
Corporate finance is linked to the studies done on the money decisions of a business, which basically involves everything that is decided within the business, no matter what the area.
The concept is based on the principle of maximizing the value of a company. Through corporate finance, issues such as investments to be made, the need for project financing by third parties, the correct establishment of dividends, payment of bills, separation of fixed and variable expenses, among other actions, will be decided.
The Importance of Finance Control
By controlling finances, the company is aware of its actual financial situation. That is, you know exactly how much you have in cash, the amounts that can be invested, among other variables.
Having this type of resource management is also important for project feasibility studies, the need for credit sources, establishing strategies to build creditor confidence, and promoting the effective and rational use of available resources.
Finally, knowing the financial details helps in the process of synergy between the sectors. Thus, the organization has control over the financial needs of each one, allocating resources according to the demands.
How are corporate finances worked?
As we have seen so far, finance is much more than a conceptualization that involves paying bills and investing. Given the explanation of the previous topic, you now need to know how to work them correctly as a service.
Remember that a product company and a service company differ in some points. One is in the scope of its performance. For example, a service business operates more locally. Thus, entrepreneurs need to pay attention to the local economic reality, such as pricing.
So the tips will be helpful and help you work more consistently across different types of businesses. Check out!
Strategic planning
The first aspect worked on when talking about corporate finance is strategic planning. It comprises a series of steps such as budget, strategies, scenarios, miscellaneous policies, and budget control tools.
In the case of the budget, revenues, expenses, costs and investments will be projected from each of the company's sectors. Ideally, it should be performed annually, always projecting the costs obtained, to align the company's strategies.
In the strategy development phase, the organization should align its goals and objectives. This will require consideration of the projected sales of the services, costs they will incur, investments and the financial situation. Thus, it will be possible to have a base scenario so that the budget is as faithful as possible.
In the scenario elaboration process, the optimistic, neutral and pessimistic scenarios should be considered. In each of them, a financial projection should be made, taking into consideration previous financial reports of operation and considering inflation, market percentages, among other details.
The financial planning of service companies also needs to consider some policies, such as receipt (which means of payment will be accepted, deadlines, etc.), but also payment, forms of discharge from their suppliers, etc.
Finally, the plan considers the control tools that will make all of the activities cited perform effectively, ie software and spreadsheets that will help keep finances up to date.
Profitability analysis
Knowing the economic and financial viability of a business helps to delimit the amount charged for the product or service by balancing finances in order to understand if the return on investment will be positive. This enables entrepreneurs to eliminate those services or products that are not beneficial to the company, or even rephrase them to make them more attractive to consumers.
For this analysis to be effective, you need to look at some steps, such as:
- Projected sales for each of the services offered;
- Projection of costs, expenses and investments;
- Monthly cash flow projection.
Following cost and sales projections, which help in obtaining cash flow, enters a new phase of the process: the analysis of indicators, which collaborates with the process of defining the viability of the services offered.
These include the Minimum Attractiveness Rate (TMA), which represents the minimum expected return on investment in a project, for example. For this, it takes into account variables such as available capital and expected profit margin.
Asset and Liability Management
Asset and liability management is also a part of everyday business, and it is important that you be aware when offering this service in your portfolio. Assets are the assets held by the organization, such as cash, inventory and receivables. We can define them as the amounts that can be invested and generate cash flow.
In the meantime, liabilities are debts, ie amounts that need to be paid over time. The management of these assets foresees the use of tools that help the investor to make decisions, creating risk awareness, which increases the chances of success.
For this, the Asset Liability Management (ALM) technique is used, which helps in risk management, avoiding the disintegration of assets and liabilities. It will allow the entrepreneur to vary his investment portfolio, for example.
Your job will be to manage how this will be done, aiming at maximum profitability and considering variables. Some of these are pension funds and also investments according to the financial institutions.
How to measure the financial health of the business?
The corporate financial control is essential, as we see here. Therefore, one must learn to measure the financial health of the business. In the previous topic, we even mentioned performance indicators. Here are some more that can have a significant impact on finance and are essential to your work.
Revenues
Billing is the result of the sum of sales made by companies in a given period, both products and services. It can (and should) be done monthly and annually.
This aspect helps to gain insight into the financial performance of the venture. Remember that you need to consider not only gross but also net sales. While the former takes into account the entire amount received, the latter, in turn, considers the total received minus the taxes paid on each sale.
Receipts
It should be noted that receiving and invoicing are not the same thing. Imagine that the company is selling a lot of products, but may not have proportional receipts. This is when the option of installment and installment sales is more common.
Receipt needs to be close to billing - that's ideal. Therefore, it is important to measure the receivables ratio in order to assess whether there is high default, the main causes, as well as the establishment of strategies to make collections . In the latter case, as the service is offered by you, it is important to be aware of the types of actions that are right for different businesses.
Fixed and variable costs
Costs can be categorized in different ways, as you may already know. To measure the financial health of a business, one of the first steps to watch out for is the fixed cost. This type of expense does not change, even if production increases or decreases, and is directly linked to the structural and operational maintenance of the business, such as rent, security and cleaning services, among others.
Despite the constant change, knowledge about variable costs is equally important. They vary according to the increase or decrease of production. In the case of service companies, they depend on their demand, ranging from raw materials, electricity to sales commissions.
Both are essential for designing Corporate Finance Services in Dubai, especially with regard to rebate policies such as reducing the final price charged to the customer, and are crucial for maintaining a record of accounts and categorizing them, which contributes to the process. Sustainability of the enterprise.
Debt Ratio
Another indicator that helps in verifying a company's financial health is its debt ratio. This parameter should be used to identify the proportion of company assets that were funded by third party resources. In other words, those debts that needs to be settled by the business in the future.
It is essential to follow this index when the company begins to contract financing debts. Understanding the evolution of this amount will help ensure that accounts are under control.
The calculation is simple: the total capital from third parties (short and long term liabilities) is summed, and the number obtained is divided by the total assets held by the company. It is worth remembering that an unsatisfactory indebtedness index does not mean that the enterprise is not sustainable nor the opposite and other variables need to be considered in this calculation.
Average ticket
The average ticket has a big impact on the finances of a business. It is an indicator that corresponds to the average value of sales, being based on the volume of sales made in a period.
The calculation helps in identifying the needs of strategic adaptation, reinforcement of investments and also in the sales team. In addition, it shows how much the company sells, the impact of production costs and interference in buying choice.
Balance point
The Break Even Point (PEF) is a point that refers to the financial parity of total income and expenses over a given period. This indicator allows a calculation of the minimum monthly billing required for a business to cover expenses. Therefore, this amount is for both fixed and variable spending, as well as how much is needed to start making a profit.
To evaluate it, it is necessary to consider the activities developed and the sector of activity of the enterprise. Through it, it will also be possible to define the needs of a larger working capital, but also the possibility of investing the remaining resources, to avoid cash outages.
Read also: ERP Accounting Software solutions in Dubai
Income Statement (DRE)
One of the best ways to understand about a business's finances is through its DRE. This financial report includes data on gross operating revenue, cost of sales, expenses and net income. All of this serves as the basis for you to work on the finances of a business, having the right insight into how it invests your money, but also how and what are the costs built into it, and what can be done to decrease them. .
By the way, as it is a mandatory and official document, the data must be indicated with the maximum fidelity. So this will be the basis of all your work, as using any of the above indicators requires consistent information.
