Corporate Financial Planning a Big

Corporate Financial Planning

A big part of corporate financial planning involves the proper capital structure of a firm and its finances, inclusive of its debt obligations, insurance costs, tax burdens and revenue streams. All of these financial pieces to the puzzle have to be massaged and managed in concert in an effective way so that cash flow is as optimal as it can be while the daily operations of a firm are managed effectively, including marketing, research and development, administration, debt management, accounting and so forth.

Historical Lessons

One academic work consulted for this piece is actually from 1980 but it reads very similarly and evokes much the same questions as one would expect to see in a more recent article given the travails and events of the recent global economic crisis and, as it was called in the United States, the Great Recession. 1980 was a key year in American history as it marked a mid-point of some major economic strife that was in many ways the highest since the namesake of the Great Recession, that being the Great Depression which occurred in the 1930's and from which the United States did not fully recover until the war machine kicked in the late 1930's and early 1940's (Taggart, 1980).

One key point of the 1980 treatise was that many firms used tax savings and costs as a balance to bankruptcy costs and it is noted by the author that many people actively assailed that practice at the time. However, one potential aggravating factor to this being the case, also as noted by Taggart, was an unsettled debt and financial market and how this led to businesses having to operate without having view of the full economic "puzzle" that would typically be desired so as to allow for the best and most adept decisions. One of the approaches dictated is a capital structure decision, whereby the portfolio equilibrium of a company is dictated by the supply of securities on the open market at a given time (Taggart, 1980).

Corporate Financial Planning -- Public vs. Private

A much more recent work explores access to capital, a general review of capital structure, and the overall funding of the firm, as intimated and mentioned in the introduction of this report. This report notes that the activities and experiences of publicly held firms is widely known, even if constantly debated nonetheless, as there is much more data access to the history and performance of those expenditures and capital structures. However, it is noted that much less is known about private firms as they are under no compulsion to tip their proverbial hand as it relates to investments, securities, capital structure and corporate financial planning decisions. The study notes that there is a very noticeable difference between the activities of public firms as compared to private firms. One screaming example was the leverage ratio of private firms being roughly 50% higher (33.7% versus 22.7%) than their public counterparts (Brav, 2009).

The same work also notes that privately held interests with no access to public bond markets are much more restricted in their lending and financing options and this usually leads to a lower leverage ratio when this is the case. The study focused on the laws and structure in the United Kingdom and it vexed the researcher why two different types of firms operating under the same tax laws had some different financial characteristics. One theory as to why this was the case was ownership structure, with public firms having to answer (and get permission, in many cases) from a disparate array of shareholders whereas private firms are usually held in large part by single shareholders or a rather small collective of them. Often times, the collective is a family or other related group of people, which obviously would have implications on decisions made and who is allowed to make them. In short, corporate financial planning oversight can be greatly restrained and monopolized if the locus of corporate control is not all that large (Brav, 2009).

Macroeconomic Condition Influence

Another unquestionable influence on corporate financial planning and the capital structure of the firms being managed are the wider macroeconomic conditions of the economy, whether it be regional, national or global, that is in play for a given firm. As the 2007-2009 global recession proved, macroeconomic metrics being shoddy can have significant repercussions on what is done and why vis-a-vis capital structures in firms. Many firms have become very conservative and have reduced risk exposure greatly. Many pundits and scholars have lauded this decision as it's been viewed as a cause of the economic fracas in the first place but some others have said that firms are being too conservative and unwilling to invest when they can and should. Even so, cash flows generally do not rise during recessions, so this easily explains why corporate financial planning and how it leads to capital structure changes is so much more conservative during harsh economic times (Chen, 2010).

One item that macroeconomic conditions affect is the debt markets and how expensive it becomes to borrow money. One study looked at for this report assessed heterogeneity of debt and how it affects the research and development as well as the firm performance at large for a company. Obviously, all firms must plan for the future and if their debt and/or broader capital structure restricts their ability to innovate and thus remain competitive, this will constrict their ability to thrive and survive. As such, effective corporate financial planning must ensure that the mix of debt used and the broader capital structure is in sync with the long-term needs and goals of the firm (David, O'Brien & Yoshikawa, 2008).