Corporate finance and Macroeconomic trends are co-related to one another. Macroeconomic trends are dynamic and keep on changing according to the global economy. Therefore, the financial decisions of any corporate company change according to the current trends.
Ignoring the current Macroeconomic trends is extremely disastrous and may negatively affect the company's growth. Therefore, companies are steadily hiring Chief Financial Officers so that they can track the latest Macroeconomic trends. A CFO course will help you elevate your career trajectory as a Chief Financial Officer and comprehend the trends better.
This article will assist you in understanding various Macroeconomic trends and how they shape corporate finance decisions.
What do you know about Corporate Finance?
There are various sub-fields of finance and corporate finance is one of them. This field of finance usually deals with corporate investment decisions, corporate accounting, tax considerations, and capital structuring. Corporate finance also deals with funding resources that a corporation is seeking.
Corporate finance also assists a company in elevating the value of its shares by maintaining a balance between profitability and possible threats. Shareholders' value is also increased through long-term financial and short-term corporate financial strategies. There are two types of corporate finance, one is equity financing and the other one is debt financing.
In the case of equity financing, a company raises its finances through equity insurance or other earning sources. On the other hand, in debt financing a corporate company resources its earrings in the form of loans. Issuing bonds or financial institutions generally issue these types of bonds to a company.
Necessity of Corporate Finance
In such a competitive business world, corporate finance plays an extremely crucial role in every company. Some reasons have been elucidated here that state the importance of corporate finance:
- With the assistance of corporate finance, a CFO can easily decide where all the funds are going to be allocated so that the company can achieve its desired goal without any hassle.
- Corporate finance is also important because it helps a company to manage all its financial risk factors like fluctuating interest rates or a fluctuating stock market.
- It also helps a company to optimise the risks that arise from currency.
- There are many tools associated with corporate finance that help a company to many reasonable economic strategies for more growth and profitability. These tools are extremely helpful in the long run.
What are the various areas of Corporate Finance?
Corporate finance is associated with three main areas. These areas are:
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Capital Financing
Capital financing is the first area and the central pillar of corporate finance. This element decides how the businesses as well as investments of the company will be capitally financed.
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Working Capital Management
A company needs to track its cash flow so that it can maintain its liquidity and daily operations. In certain instances, tracking the entire cash flow might become hectic for a CFO. Hence, in such a scenario, working capital management, the second area of corporate financing enters so that cash flow can be tracked efficiently.
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Capital Budgeting
The final area of corporate finance is capital budgeting. This area allows to invest most of the funds of a company for such a project that will surely turn out to be profitable in the future.
One who is willing to commence a career as a CFO of a corporate company can learn more about these finance areas in any well-known online CFO course.
What are the activities that fall under Corporate Decision?
Certain activities of a venture can be performed with the help of corporate decisions. The activities that fall under corporate decision are:
Capital Investments
One of the most important activities of corporate financing is capital investment. This assists a company with its capital investments which are generally executed through capital budgeting. Budgeting helps a company to recognise its expenditures, decide which project it should include in the annual budgeting, and also estimates the cash flow that is required for future projects. Hence, good capital budgeting leads to efficient capital investments.
Capital investments have serious outcomes on a company’s business and hence it is one of the most important tasks that corporate financing has to carry out. A poorly planned capital budget will have an adverse effect on the company’s economic condition.
Short-Term Liquidity
The second task of capital decision is to maintain and manage short-term liquidity. This helps a company to continue its production without any disruption. Short-term liquidity management deals with working capital, cash flow, assets, and liabilities.
Short-term liquidity management also assists a company in having extra credit which can be used as a backup option when there is not enough operating capital. Therefore, it is essential to have a well-planned capital budget so that a company can pay off all its current obligations which are required.
Capital Financing
The last and most important activity of corporate finance is capital financing. In the procedure, a company takes capital loans either in the form of equity or in the form of debt. Such capital debts are usually given by any financial institution like a commercial bank to the company. Otherwise, a company can raise capital from investors by diluting a certain number of shares of the company.
Diluting equity allows a company to raise a huge amount of funds and with the assistance of the investors, a company can easily expand its venture. However, diluting a huge amount of equity shares and taking continuous debt will reduce the earnings of a company. Therefore, capital financing is required to manage the finances of the company.
There are many other activities such as dividend decisions that are also directly related to corporate decisions. You can join a CFO certification program to learn about the different kinds of corporate decisions.
What are Macroeconomic Trends?
Global economics lies on Macroeconomic trends. These trends are not static hence the world economy grows or declines depending on it. Macroeconomic trends are the basic geopolitical, economic, or environmental factors that affect the economy of a specific region, country, or population.
Macroeconomic trends can either have a positive or an adverse effect on a country's economy or region. The economy will have an adverse effect if there is a natural calamity or inflation. On the other hand, a high industrial production rate will create a positive effect.
A CFO of a company should closely supervise these macroeconomic trends so that they can plan out an efficient corporate finance decision for better financial growth. Apart from the chief financial officers of various companies, many economists also closely study these trends so that the government can make better financial policies to improve the country’s economy.
Different Types of Macroeconomic Trends
There are various macroeconomic trends that directly have an impact on the global economy. These trends have been vividly elucidated below:
Inflation
Inflation is a phenomenon where the prices of various goods increase over a span of time. If inflation takes place within a very short period then the economic condition of that nation is unstable. In such a case this macroeconomic trend has a negative impact on the economy.
Steady inflation which is inflation that takes place over a larger period is considered to be normal. Therefore, it is considered as a positive macroeconomic trend.
Interest Rates
Interest rates that the banks offer depend on the value of the currency of a particular nation. If the rates of interest are on the higher side then the value of the currency from that country is also at the higher end. The rates are derived by calculating the incomes of a country that have been earned through investments.
Gross Domestic Product (GDP)
One of the most popular macroeconomic trends is the gross domestic product or the GDP of a country. This is a parameter that tells the total monetary value of the goods and services produced by a nation in a particular financial year. GDP includes the annual expenditure of a government along with its citizens which affects national investments and international trade.
National Income
The annual money that a nation generates and which ultimately has a positive impact on the economy of the country is known as national income. The national income of a country helps the economist to understand the economic growth of that country and whether the standard of living inside the nation has increased or not.
Monetary Policy
The Monetary policy of a country is shaped by the government and the large banks situated in that nation. These banks include both private and public sector banks. The monetary policy includes decisions regarding the rate of interest, governmental budgets, inflation, etc.
A well-planned monetary policy helps the government to control the circulation of cash flow inside a nation.
International Trade
Exporting and importing goods from foreign countries is considered as international trade. It has a great impact on the value of the currency of that country and also increases the demand for goods across the globe. The currency of a country is considered to be of higher valuation if they are exporting more amount of goods to other countries and are importing less inside their country.
This indicates that the goods from those countries are in high demand and therefore their currencies are also in higher valuation. If a country is importing more goods and is exporting fewer goods then in that situation the currency of that country will not have a higher value. This situation is termed a trade deficit.
Economic Growth Rate
The economic growth rate of a is figured out by comparing the revenue generated by selling goods and providing services in current years with the previous years. If the revenue is higher than the previous years then the country has a positive economic growth rate. Whereas, if the revenue is less than the previous years then the economic growth of the country has been negatively hampered.
Employment
The employment rate of a country also has an impact on the economic condition of that country. If the rate of employment is at the higher end in the given country then their financial position is quite high. If the unemployment rate is higher in a country then the economic position of that country is not at a stable position. A country will a high employment rate will have citizens who are willing to spend more money which will eventually upgrade the country’s economy.
Industrial Production
Industrial production is one of the most volatile factors that contributes to macroeconomic trends. The revenue from industrial production is the biggest source that contributes to the economy of a nation. The revenue from the main industry of that nation is considered while evaluating the economy.
Business Cycle
The business cycle is one of those macroeconomic trends that allow the CFO of a company to easily predict future economic growth, recovery, and recession. The business cycle can be recognised when there is a period when the country has a high production rate and a low unemployment rate that eventually turns into a low production rate and high unemployment rate. This cycle has a huge impact on the economic growth of a particular nation.
Retail Sales
Retail sale is a value that shows an insight that states the amount of money the citizen of a nation is spending on retailed goods. This insight is tracked by small as well as big businesses to understand the economic condition of a country. Economic growth and retail sales are directly proportional, if retail sales grow then automatically the economy of a nation will grow.
A CFO of a company must keep on checking these trends so that he is updated with the latest economic situation of a country. This will further help him to make an efficient corporate finance decision according to the current economy for the company and its growth.
How Macroeconomic Trends Can Shape the Corporate Finance Decisions of a Company?
Corporate finance decisions can be set and planned according to the current Macroeconomic trends. There are various steps following which a company can execute an efficient plan for further growth. Here are some steps following which a company can grow according to the current Macroeconomic trends:
Need to Identify the Crucial Indicators
There are many macroeconomic indicators however a company just needs to identify the indicators that are crucial for their business. There are several crucial indicators like GDP, exchange rate, inflation, interest rates, etc that can directly impact a company’s business. There are several methods through which a market can be predicted by simply calculating these indicators.
For example, when the interest rates are low, a company can spend more on consumer experience.
Continuous Supervision of the Latest Macroeconomic Cycles along with Trends
Macroeconomic trends take a longer time to change, however changes in macroeconomic cycles take place rapidly. Change in macroeconomic trends leads to growth, decline, stagnation, etc. On the other hand, changes in macroeconomic cycles lead to recessions, booms, etc.
The latest trends in macroeconomic trends and cycles must be tracked regularly and must be compared with the previous trends and data. This procedure will help a company to identify the future economic conditions and threats that may take place and plan their finances accordingly. Financial decisions that are taken on the basis of macroeconomic trends are prone to have positive results and growth.
For example, if the economy of a country has entered recession then a company's cash flow and sales will reduce drastically. Hence a company must prepare itself to face such consequences beforehand.
Benchmark Performance
A company's performance is directly influenced by macroeconomic trends hence competition increases in such circumstances. Thus, a company should secure its performance against its competitors and should closely compare is performance with the competitors. This helps a CFO to understand their strength as well as weakness and how can it be resolved.
If a company makes an efficient plan by analysing the macroeconomic trends then it would be performing better than its competitors. It also indicates that the company has worked tremendously hard to build a loyal customer base in such a competitive environment.
Survey all the Possible Threats and Opportunities
There are plenty of possible opportunities as well as threats that are created by the macroeconomic trends. The CFO should explore these opportunities as well as threats to understand if it is going to contribute to the growth of the company or not. This will also allow a company to explore other kinds of diverse products, start a new partnership, or step into a new market section.
When a country's exchange rate decreases, companies start exploring the import market segment from where they can import foreign goods at a lower exchange rate.
Conclusion
Macroeconomic trends are quite complicated and dynamic. Therefore, a company should hire an experienced CFO who can analyse and study these trends to plan an efficient financial decision that will help the company to grow. To commence a career as a CFO you must learn the basics from an online CFO course.
You can check out the new CFO certification launched by Imarticus Learning in collaboration with the Indian School of Business (ISB). This 8-month online course will help you to understand more about macroeconomic trends and how you can use them to make financial decisions as a CFO. You will get a top-notch faculty to guide you throughout this course.
Hurry up grab this opportunity and enrol yourself in this CFO course.
