Running head: BIBLICAL PERSPECTIVE ON RISK IN CORPORATE FINANCE
Biblical Perspective on Risk in Corporate Finance
God created humans with an intrinsic ability to balance risks and rewards, and we see this clearly in the measurement of risk taken by investors when determining whether to invest in securities and become shareholders in a publically traded corporation. When investors become shareholders in a corporation there unavoidably is an opportunity cost of capital, a risk taken by investors that investments placed with another corporation’s securities could yield a greater rate of return. Because of this risk, investors must learn how to measure risk to ensure the greatest yield in return for an investment.
Two types of risk can be measured by investors: specific risk and market risk. Specific risk derives from events that only affect an individual corporation and its nearest competitors, and can effectively be eliminated through security diversification. On the other hand, market risk derives from macroeconomic events that affect all corporations, and therefore cannot be eliminated through diversification. Regardless of the type of risk, the measurement of risk when it comes to shareholder investment is no easy task, as the market’s variability remains unpredictable and increasingly volatile throughout recent years (Bora et al., 2019, pp. 3-10). Yet, as believers, we are given the Bible as a guide to the overall measurement of risk that remains constant and reliable. The following will analyze what God says about risk throughout the Bible, and how these principles can be applied to the measurement of risk in corporate finance.
Risk in the Bible
God created risk through human uncertainty of the future. As Ecclesiates 8:7 states, “For he does not know what is to be, for who can tell him how it will be?” (English Standard Version). Some scholars even claim that God not only created risk, but took risk upon Himself by creating humans with free will (Gregersen, 2003, p. 369). Regardless of the no-risk versus risk-taking
God arguments, it is clear that life as believers in Christ demands a risk-taking attitude through faith in Christ, faith even unto death (Mark 8:35, English Standard Version). God has a plan for believers beyond salvation, and He invites believers “to enter into that plan even without knowing the full extent of His plans” (Van Drunen, 2015, p. 63), thereby inciting a faith-based, risk-taking attitude among believers. As stated in the creation mandate, part of God’s extended plan for believers is to subdue and cultivate creation to produce fruit from labor, or in financial terms to produce a return from investment (Genesis 1:28, English Standard Version). 2 Corinthians 9:6 attests to this mandate by stating, “Whoever sows sparingly will also reap sparingly, and whoever sows bountifully will also reap bountifully” (English Standard Version). Therefore, “the world is created by a benevolent God in such a manner that invites a risk-taking attitude and rewards it in the long term” (Gregersen, 2003, p. 368).
This risk-taking attitude is often expressed through believers in the Bible, such as Noah, Abraham, Esther, Daniel, and Paul, who are driven to take risks through trust in God and His faithfulness. As Paul states in Philippians 4:12-13, “In any and every circumstance, I have learned the secret of facing plenty and hunger, abundance and need. I can do all things through him who strengthens me” (English Standard Version). Jesus even comments on risk-taking from a financial perspective in the form of parallel parables told in Matthew 25:14-30 and Luke 19: 11-27. In both parables, a wealthy man goes on a journey and entrusts his three servants with varying amounts of money to “engage in business” (Luke 19:13, English Standard Version) while he is away. When the wealthy man returns, he discovers that the servants have managed their respective entrusted monies differently. In both parables, two of the servants have invested their money and made a profit, while the third servant has not invested his money and returns the exact amount he had been given to his master. The two servants who invested their money and made a profit are praised and rewarded by the master for their risk-taking, while the third, noninvesting servant is reprimanded by his master for being idle with his entrusted money. In Matthew 25:27, the master tells the idle servant, “you ought to have invested my money with the bankers, and at my coming I should have received what was my own with interest” (English Standard Version). Both parables can be interpreted as a warning against idle behavior, and from a financial perspective, a warning against risk-averse behavior that is not in good stewardship of
God’s creation entrusted to us as believers (Bøsterud & Vorster, 2019, pp. 4-5).
The Bible additionally provides wisdom on the management of financial risk.
Ecclesiastes 11:1-2, 4, and 6 states the following:
Cast your bread upon the waters, for you will find it after many days. Give a portion to seven, or even to eight, for you know not what disaster may happen on earth…He who observes the wind will not sow, and he who regards the clouds will not reap…In the morning sow your seed, and at evening withhold not your hand, for you do not know which will prosper, this or that, or whether both alike will be good. (English Standard
This passage clearly demonstrates the financial leverage that comes with managing risk through diversification (Brooks, 1996, p. 23). By “giv[ing] a portion to seven, or even to eight”
( Ecclesiates 11:2), the author is diversifying investments in preparation for risk, but in hopes of a return of profit. “He who observes the wind will not sow” (Ecclesiates 11:4) due to his analytical observation of his circumstances instead of trusting in God. Thus, the management of risk should be taken with full trust in God, as we “do not know which will prosper” (Ecclesiastes 11:6).
Despite the promotion of risk-taking behavior through faith and in good stewardship, the Bible also condemns excessive risk-taking as Proverbs 13:11 states, “Wealth gained hastily will dwindle, but whoever gathers little by little will increase it” (English Standard Version).
Ultimately, as believers, we are to take risks out of our faith in Christ and not in the uncertainties of wealth. As Paul states in 1 Timothy 6:17, “Command those who are rich in this present world not to be arrogant nor to put their hope in wealth, which is so uncertain, but to put their hope in
God, who richly provides us with everything for our enjoyment” (New International Version).
From this analysis, it can be determined that the measurement of risk according to the Bible is based on the potential of an investment to serve God’s purposes on the earth, that being the flourishing of humanity and creation for His glory. Therefore, investors with a Biblical perspective should be prudent in their measurement of risk and subsequent risk-taking actions of investment, acting in faithful stewardship of the assets entrusted to them by God. Ultimately, regardless of risk, investors should remember that no financial profit can match the gain found in Christ. As Philippians 3:7-8 states, “But whatever gain I had, I counted as loss for the sake of
Christ. Indeed, I count everything as loss because of the surpassing worth of knowing Christ
Jesus my Lord” (English Standard Version).
Bora, M., Hue, B., Jinks, A., Siew, S., & Spain, J. (2019). Investment risk for long-term investors: Risk measurement approaches. British Actuarial Journal, 24 (26), 1-18. DOI:
Bøsterud, M., & Vorster, J. M. (2019). Pastoral banking practice – A Christian-ethical and pastoral perspective on financing, credit and moneylending. In die Skrifling, 53 (1), 1-10. https://doi.org/10.4102/ids.v53i1.2409.
Brooks, R. (1996). Financial risk: An alternative Biblical perspective. The Journal of Biblical Integration in Business, 2 (1), 16-24. Retrieved from https://www.cbfacbar.org/index.php/jbib/article/view/272.
Gregersen, N. H. (2003). Risk and religion: Toward a theology of risk taking. Zygon Journal of Religion & Science, 38 (2), 355-376. https://doi-org.ezproxy.liberty.edu/10.1111/14679744.00504.
Van Drunen, L. D. (2015). Debt, risk, and grace. Journal of Markets & Morality, 18 (1), 61-79.
Retrieved from https://go-gale-com.ezproxy.liberty.edu/ps/i.do?
How LEGO Revived Its Founder’s Mentality global history essay help: global history essay help
Liberty University BUSI 400 Individual Assignment 1 Complete solution
Competitive advantages that are unique, valuable, and
difficult for rivals to copy are likely to make these advantages.
The four key attributes of strategic management
do not include:
Ambidexterity in a strategic context refers to the challenge for
a manager to
Management, the board of directors, and ______ are the
primary participants in corporate governance.
At what level in the organization should the strategic
management perspective be emphasized?
What is the hierarchy of organizational goals (from the least
specific to the most specific)?
What do effective vision statements include?
A Turnaround at
You are about to read a short case detailing LEGO’s turnaround. You will be asked to answer questions linking your knowledge from the chapter to the situation detailed in the case.
Read the case below and answer the questions that follow.
LEGO surpassed Mattell to become the largest toy manufacturing company of the world in 2014. This was a remarkable turnaround for a company that was on the brink of bankruptcy just a decade earlier. Founded in 1932, LEGO initially produced a variety of toys. A transformation came after LEGO’s second-generation CEO, Godtfred Christiansen, had a conversation with the owner of a Danish department store. According to David Robertson, the author of Brick by Brick, the store owner told Christiansen, “What we need is not another toy, but a system of play. Something where if you buy a second set, you don’t add to your toys, you multiply what’s possible — these things can interlock and you can do more, much more.” Christiansen was so inspired by this observation that he removed 90 percent of the toys from his inventory as they did not meet the criteria of being part of a system of play. What remained were the stackable plastic bricks that are now synonymous with the name LEGO.
Focusing on its system of play and offering a fun learning-bybuilding experience to young users of the bricks, LEGO enjoyed many years of success. For example, from 1978 to 1993 the company grew at an average of 14 percent a year, doubling in size about every five years. After that, however, LEGO entered a period of decline. From 1993 to 1998, LEGO’s growth tapered off as it reached saturation points in many markets. LEGO tried to keep the growth going by tripling the number of new toys that it offered. However, sales remained stagnant while costs skyrocketed, leading to the company’s first loss, in 1998.
At this stage Poul Plougmann was appointed CEO and was charged with restoring LEGO to profitability. He laid off some 1,000 employees and steered the company toward vigorous innovation. Graduates of the best design schools of Europe were recruited to develop new products. As a consequence, the number of different types of bricks the company manufactured doubled, substantially increasing LEGO’s cost basis. Under Plougmann, LEGO also diversified into various other businesses, such as theme parks, television programming, clothing, and publications. However, the company’s lack of expertise in those areas led to poor
LEGO’s recovery did not begin until 2004, when Jorgen
Knudstorp was brought in as the new CEO. He returned to LEGO’s long-time guiding principle of being a manufacturer of a playing system that offered a learning experience for children. Knudstorp convinced the board of directors to cast off a set of distracting adjacent businesses so LEGO could embark on a five-phase, seven-year effort to return to its core.
According to David Robertson, “What they realized is that these ideas about how you should innovate, all of the things that drove them from 1999 to 2003, had driven them out of control. The ‘out of the box’ thinking almost put them out of business. What they did after 2003 is they kind of went back in the box. They went back to the brick, and they focused more on the police stations and the fire trucks and the other things that not only were what their fans wanted, but were also pretty profitable for them. When they went back in the box, they found that there was a lot of money in the box and
that fans returned to the brand.”
10.Robertson explains that “The big difference between LEGO now versus LEGO in 2001 and 2002 is that back in 2001, if you were a LEGO designer you would have been told: ‘Create a great toy. Do something really cool. Do something that’s really going to excite kids.’ And what you got was toys that weren’t very LEGO-y, toys that weren’t very profitable….” In contrast, LEGO designers are now challenged to create great projects using existing bricks.
This enables the company to use them in lots of different
sets, make them in very high volumes, and generate lots of profit from every set made. This refocusing helped LEGO achieve an average sales growth of 24 percent annually from 2008 through 2012, with profits growing 40 percent
Sources: “How LEGO Stopped Thinking Outside the Box and
Innovated Inside the Brick. David Robertson’s interview by
[email protected],” July 2013, accessed on September 4, 2015, http://knowledge.wharton.upenn.edu/article/how-legostopped-thinking-outside-the-box-and-innovated-inside-the-
Zook, Chris. “How LEGO Revived Its Founder’s Mentality,”
2013, accessed on September 4,
Which of the following statements best reflects a romantic
view of leadership at LEGO?
Overall, the case demonstrates how changes in ________ affected LEGO’s performance.
Based on the case, which of the following gives LEGO a
sustainable competitive advantage?
Which of the following statements best captures LEGO’s
Make a unified playing system that offers a learning experience for children worldwide.
13.This short case details Mayo Clinic’s assessment of its external environment.
14.Read the case below and answer the questions that follow.
15.Very often when organizations project environmental trends into the future they see a bleak picture. Such “gloom and doom” scenarios, however, might actually be the result of a tendency to be selective about what we see or, even more often, our inability to see possible opportunities in what might seem like unrelated or peripheral developments.
16.Take the case of Mayo Clinic, the internationally known notfor-profit hospital based in Rochester, Minnesota. Back in the 1980s, when they undertook an analysis of the future, what they saw was a depressing picture with an aging population, decreasing Medicare and Medicaid reimbursements, and ever-increasing losses in their emergency room operations. Thus, both the economic and demographic trends looked bleak. However, Dan Burris, a consultant, discovered a number of significant hard trends occurring that many hospitals typically did not consider when making future
plans. These technological trends included:
Continuing declines in the prices of PCs
Increasing speed and computing power of PCs
Huge increases in the capacity to store, distribute,
and search for information
Increasing presence of PCs in virtually every home
in the U.S. and outside
17.Being a leading research hospital, the Mayo Clinic had developed over the years an enormous amount of knowledge about how to diagnose, manage, and cure a variety of diseases and health conditions. Although this knowledge was developed primarily to treat patients, Dan Burris saw a huge opportunity for the Mayo Clinic to derive revenue from this knowledge by selling this information to a public that is hungry for reliable medical information written in an accessible fashion. The result was a CD that it sold to customers for $100. With this CD, the users could access information that would help them to determine, for example, whether their child’s rash or fever was something they could treat with an ibuprofen or something that needed an immediate trip to the emergency room. In the first year, 670,000 CDs were sold !
18.In addition to the extra revenue that the CD generated, Mayo’s entry into the knowledge market had many unanticipated positive benefits. For example, the popularity of the CDs established the Mayo brand as a leader in healthcare, a name millions around the world would instantly recognize. Second, it helped Mayo transform itself from just another organization that delivers on-site healthcare to a one-of-a-kind organization that delivers health-related knowledge and expertise all around the world.
19.Today, when one visits MayoClinic.com, they see their slogan “Tools for healthier lives,” which it claims draws on the expertise of more than 3,300 physicians, scientists, and researchers. The website lets one search for information on a wide variety of topics, including diseases and conditions, symptoms, drugs and supplements, and first aid. It also includes new and updated information on such topics as
2012 trends for cancer survivors, options for dealing with adversity, and how to spot and take action when experiencing job burnout.
When Mayo Clinic conducted its analysis during the 1980s, what two segments of the general environment did it initially
If Dan Burris conducted a SWOT analysis for Mayo Clinic when he was consulting for them in the 1980s, he most likely would have classified the increasing availability of home computers as a(n) ________ and Mayo’s knowledge of health issues as a(n) ________.
Mayo Clinic’s 1980s analysis of the future is best described as
an example of ________.
In response to its assessment of its external environment in the 1980s, since then Mayo Clinic has ________ the other members of its strategic group from the 1980s.
20.Gas versus Hybrids:
A Battle of
21.The success and then decline of the hybrid vehicle industry are discussed. Other substitute products are examined to detect how they have been able to reduce hybrid vehicles’
advantage: fuel efficiency.
22.The threat of substitutes is exhibited in this case. The emergence and stagnation of the hybrid car industry is discussed. Causes and implications are also briefly addressed.
23.Read the following case and answer the questions that
24.Hybrid cars such as the Toyota Prius have seen tremendous success since the first hybrids were introduced in the late 1990s. Yet, the market share of hybrid cars in the U.S. fell from an all-time high of 2.8 percent in 2009 to 2.4 percent in 2010 and even further to 2.2 percent in 2011. These results are even more surprising given that the number of hybrid models on the market has increased each year from 17 in 2009 to 30 at the start of 2011. That’s more choices, but fewer takers. While some may think that the hybrid car industry feels pressure from other novel car segments, such as electric cars (e.g., Nissan Leaf), competition comes from
an unusual suspect: plain old internal gas combustion cars!
25.The primary reason environmental and cost-conscious consumers prefer gasoline-powered over hybrid cars is rather simple. Engines of gasoline-cars have increasingly challenged the key selling attribute of hybrid cars: fuel economy. While hybrid cars still slightly out-compete modern gasoline cars in terms of fuel economy, consumers increasingly don’t see the value of paying as much as $6,000 extra for a hybrid when they can get 40 mpg on the highway in a gasoline car, such as the Hyundai Elantra or the Chevrolet Cruze.
26.Gasoline-powered cars may also out-compete hybrids on other selling attributes. For instance, buyers may prefer mature technologies in gasoline-powered cars that don’t come with the uncertainty of new technologies, such as doubts about the longevity of hybrid batteries. Moreover, new car generations like the Nissan Leaf and Chevrolet Volt allow consumers a sneak preview into the future. J.D. Power’s most recent U.S. Green Automotive Study suggests that some customers would rather wait and invest their dollars in this new generation of electric cars. Customers holding out for electric cars that won’t use any gasoline at all and the technological advancement of gasoline engines caused the unexpected comeback of the gasoline car.
27.Sources: Naughton, K. 2012. Hybrids’ unlikely rival: Plain old cars. Bloomberg BusinessWeek, February 2: 23–24; ValdesDapena, P. 2011. Hybrid car sales: Lots of options, few takers. money.cnn.com, September 30: np; and ValdesDapena, P. 2011. Green cars are ready, car buyers aren’t. money.cnn.com, April 27: np.
Since 2009, market share of hybrid cars in the U.S. has _____________.
What advantage of hybrid vehicles have gasoline-powered
vehicles begun to neutralize?
Which of the following is a reason for the sluggish sales of
Which of the following products would not be considered a
substitute to the hybrid car industry?
29.This video explains the Analyzing Industry Forces.
30.Click the ► button to watch the video. To view a video in full screen, click the full-screen button [ ] in the lower right hand corner of the video player. Then, answer the questions that
A Porter’s Five Forces analysis can help understand why ______.
The threat of substitutes comes from which of the following?
When suppliers are concentrated, the industry ______.
This video explains Analyzing the Macro-Environment.
Click the ► button to watch the video. To view a video in full screen, click the full-screen button [ ] in the lower right hand corner of the video player. Then,
answer the questions that follow.
Which statement about the purpose of PESTEL is correct?
PESTEL stands for ______.
One important factor to consider when using PESTEL is that ______.
In the five-forces model, ____________ is the possibility that the profits of established firms in the industry may be eroded by
When is the bargaining power of the buyer greater than that
of the supplier?
31.A good manager can be flexible when it comes to sticking to the original plan; to get good results, the intended strategy has to become the realized strategy.
Which of the following is not one of the recommended criteria for strategic objectives?
In the ________ view of leadership, the leader is the key force in determining the success of an organization.
Vision statements are more specific than strategic objectives.
Management innovations such as total quality, benchmarking, and business process reengineering always lead to sustainable competitive advantage because everyone else is doing them.
32.The idea that organizations are not only accountable to stockholders but also to the community-at-large is known as social responsibility.
33.________ tend to be quite enduring and seldom change.
34.The only stakeholders of real interest for an organization are the shareholders.
False13. Stakeholder symbiosis is in direct contrast with ________ thinking.
35.Strategic management involves the recognition that both effectiveness and efficiency must be fully satisfied.
36.There is little relationship between CSR behaviors and consumer reaction to the products and services of the firm according to survey results listed in the Harvard Business Review.
37.Among the leaders needed for an effective strategic management process are ________, who, although they have little positional power and formal authority, generate their power through the conviction and clarity of their ideas.
38.Under which conditions, according to the Porter five-forces model, can a supplier group gain power?
39.Which of the following is not an explanation for the existence of exit barriers?
40.Typically, a firm has a substantial ability to control trends in its general environment—if it can predict them correctly.
41.Technological innovations do not effect industries in their entireties, just individual products.
42.The aging of the U.S. population is both a demographic trend and a part of the economic segment of the general environment, since it has implications for tax policies.
43.Global monitoring deals with tracking changes in environmental trends that are often uncovered during the environmental scanning process.
44.Which of the following is not a reason that a manager should be familiar with the Porter Five-Forces model?
45.Technology advances have resulted in disintermediation, which is the removal of organizations or business process layers responsible for intermediary steps in the value chain of many industries.
46.Which of the following is not an important element of the political/legal segment of the general environment?
47.If a supplier group is able to maintain a credible threat of forward integration, the power of suppliers will be enhanced.
48.Because ________ often make it possible for young firms to provide services that are equivalent or superior to an incumbent, a new entrant may be able to serve a market more effectively, with more personalized services and greater attention to product details.
49.Environmental __________ involves developing plausible projections about the direction, scope, and speed of environmental change.
50.Major airlines change hundreds of fares daily in response to competitor tactics, which is an example of using
51.Industries characterized by incumbent firms with high economies of scale typically attract more new entrants.
52.All automobile makers around the world are in the same strategic group because they manufacture automobiles.
53.Currency exchange rates are an example of which segment of the general environment?
54.PPG emphasizes ________ in its strategic planning; it develops four alternative futures based on two key variables: the cost of energy and the extent of growth opportunities in emerging markets.
Numerous equally balanced competitors selling products that lack differentiation in a slow growth industry are most likely to experience high
Understanding Fundamentals of Corporate Finance as history essay help
Discussion Board 2
September 13, 2020 Hello Landon,
Thank you for your response to my discussion board post also. As you stated, a company’s valuation can come from several different factors. As stated by Brealey, Myers and Marcus, “when financial analysts need to value a business, they often start by identifying a sample of different firms”[CITATION Bre20 l 1033 ]. If you take a look into the pharmaceutical and many technological companies, you will notice that they are valued a lot higher than their book value. This is mainly because investors foresees the opportunities that comes from such things like research and development. You are so right when you mentioned, customers are the cornerstone of a business. In today’s world, that concept became a reality as companies unify teams, metrics, and focus around the customer.
It is definitely important for all investors to carefully evaluate the current market trend when faced with an investment decision. Proverbs 3:13 states, “blessed is the one who finds wisdom, and the one who gets understanding.” Therefore it is important for investors to be smart about their investment decision. Externally, stock prices are sensitive to factors like interest rates, inflation rates, and exchange rates and internally, a company’s stock prices are sensitive to its performance, organizational culture, organizational structure, industry reputation, and much more.
Brealey, Myers, & Marcus, (2020). Fundamentals of Corporate Finance. New York: McGraw-Hill
Fundamentals of corporate finance with Connect help with history assignment: help with history assignment
Running head: DISCUSSION 3 1
202020 Spring 2020 BUSI 530-D12 LUO
April 15, 2020
There is a common phrase in business: “Cash is king.” “Cash flow is the life-blood of a company. Without it, a company will fail” (Hicks, 2012). Yet, companies often have to take risks that could potentially jeopardize their cash flow (e.g., new projects, growth, capital budgeting, etc.). Assume you are the CFO of a struggling company. While you do have a positive cash flow, it is minimal at best. If something does not change soon, the company will go under. Fortunately, your product development team has just created a new product that will not only save the company from financial demise but will also revolutionize how the industry does business. The problem is that the product is still 2 years away from being able to be sold to the public, and you will run out of cash within the next 6 months. How would you propose obtaining the funds needed to keep the company alive and thriving for the next 2 years until you are able to see a return on the product development? How would you keep the stakeholders happy?
“Cash is King”
Hearing the term “cash is king” is a way of thinking among society throughout the financial public. With everything going on right now in the world with Covid 19 we could say that indeed cash is king. “Cash is king” is the viewpoint that a company with a surplus of cash has the ability to continue to invest in ventures by altering the cash asset to that of fixed assets. Companies are faced with the stock markets crashing so many investors are looking toward cash as being the safety net. Organizations are not as exposed to the tightening credit market as rival companies. Having additional debt size may not translate into genuine elasticity if that volume cannot be retrieved, however, having cash available will allow for investment no matter what the stock conditions might be (Smith, 2014).
Being CFO of a company that is struggling, I would need to evaluate goals and plans in the short term along with the long term. For short term I could look to find investors that would be willing to invest in the company trusting in new and hopeful developments. Utilizing venture capitalists which is a type of investor that look to fund various projects that organizations are proposing. They tend to trust that even though it will be two years before the product will be sold to the public, they trust that it will financially be a good investment. fund a great number of projects across the world. I would work to find these types of investors to keep the company afloat.
I believe long term it is important to find ways to cut cost as a company. It is important that managers at various levels work to do what they can to reduce the cost of their department. As CFO I would hold meetings with the upper level management to explain financially where our company is at and where it has the potential of going. I would work to have us create a strategy that will carry us while we finish production and assist the company with policies and procedures that help us financially through the years. These strategies will help in keep stockholders happy. The biblical versus that comes to mind during this discussion is “So do not fear, for I am with you; do not be dismayed, for I am your God. I will strengthen you and help you; I will uphold you with my righteous right hand.” With all things the Lord shall bring us to greatness.
Brealey, R. A., Myers, S. C., & Marcus, A. J. (2019). Fundamentals of corporate finance with
Connect (10th ed.). Boston, MA: McGraw-Hill.
Smith, Garret C. C. Smith., Managerial Finance; Patrington 40.5 (2014): 506-534. Retrieved from http://search.proquest.com.ezproxy.liberty.edu/docview/1520633940?pq- origsite=summon&accountid=12085
Reasons why cash is King for businesses & individuals ap art history homework help
Discussion Board Forum 3
BUSI 530, Liberty University
Discussion Board Forum 3
“Cash is King”
Cash flow is the most important factor for a company to be able thrive. Smith states that
“a business’s cash flow is often cited as a key factor in its potential for long-term success” (Smith, n.d., para. 2). Without cash it is difficult, and perhaps impossible, to be able to financially succeed as a company.
As the Chief Financial Officer (CFO) of a business that has a positive cash flow, but a potential financial demise is on the brink, something must be done – and soon. Since the product development team of said company is in the process of creating a product to save the company and transform the way business is handled, there are many aspects to look at in terms of how to obtain funds needed to keep the company thriving for years to come.
In order to ensure the company does not fail at obtaining the funding needed to see a return on developing a new product, there are multiple options to consider. Spending money on research and development (R&D) would be a good investment if funds were available, but unfortunately that is not the case. Nonetheless, much research should be conducted and options weighed in terms of how to successfully develop a new product without tanking the business.
One possibility is taking out a loan. The downside of this is when seeking out a loan a down payment is required, which is hard to come up with when funds are not easily and readily available. There is also interest that accrues on a loan and may be difficult to pay back, depending on the long-term success of the product sales and profits.
Another method to use in order to prevent failure of producing a new product would be to develop a business acquisition. This could be done with a company that is familiar with the future product and would benefit from the merger. However, cash is needed in order to procure such relationship.
If seeking a somewhat immediate cash flow, one way of achieving this is by looking into the current product(s) the company has. By inquiring to see what is in high demand at the time and then focusing on selling that product that currently exists could improve returns. Adding to this, it may be wise to offer a discount of the current product(s) in order to boost sales. Obviously, a complete analysis of this should be researched beforehand to determine if this is a beneficial approach.
An additional tactic is financing. Brealey states that, “When a company needs to raise money, it can invite investors to put up cash in exchange for a share of future profits” (2019, p. 6). Perhaps seeking out investors’ aid could help generate the funding needed for the product development to succeed. In addition, by issuing financial assets to investors it allows the business to finance the investment in the real assets (Brealey, 2019, p. 7).
Also, in this case the company needs to raise capital in the long run. Real assets will be gained as a result of such investment, which can then be used to generate the company’s goods and services (Brealey, p. 7).
It is necessary to approach any method with caution. You do not want to invest incorrectly, such as by compromising value when investing at rates below the cost of capital or by relinquishing investing in opportunities that will create more value for the company in hopes to increase short-term profit (Rappaport, 2006). Therefore, in order to reap the profits and make shareholders happy, it seems that the best option would be to finance.
The capital structure decision can assist in determining whether the investors should take the route of equity financing or debt financing. Since it is projected that in six months cash will run out, money is needed quickly. Hence, the path of equity financing seems suitable. This way, two years down the line when profits are generated the shareholders are able to get a portion of the proceeds.
Brealey, D. (2019). Fundamentals of Corporate Finance. McGraw-Hill Education.
Smith, K. (n.d.). Reasons why cash is King for businesses & individuals. Money Crashers. https://www.moneycrashers.com/why-cash-is-king/
Rappaport, A. (2006, September). Ten ways to create shareholder value. (2006, September 1).
Harvard Business Review. https://hbr.org/2006/09/ten-ways-to-create-shareholder-value