Please review one page of Lessons from the Crisis for Corporate Finance

Financial management has become a central role in the strategy and execution of day$-$to$-$day business, but this role has not been all good news, especially during the boom years that precipitated the global economic crisis. The failings of corporate finance have led to growing concerns about the state of corporate balance sheets and the difficulty companies are now finding it difficult to implement their strategic business visions. Financial executives face challenges such as divestitures, asset sales, debt restructuring, significant losses, and expanding capital costs, often leading to equity dilution for shareholders.

The lack of business opportunities due to declining demand is not enough to explain the severely weakened state of our financial structures and institutions. In many companies, the financial function was inordinately relaxed as funding became more easily available, at ever lower costs, and for virtually any project, regardless of potential profitability. The global economic crisis serves as a "teachable moment," affording everyone $$ not just the financial sector, but also governments and regulators $$ an opportunity to reformulate financial management a fresh.

The three main functions of a Finance Department are auditing and control, treasury and fund$-$raising, and strategic planning and forecasting. The most common deficiencies detected in the management of each area in light of the crisis include:

$1.$ Lack of control in the execution of financial activities;

$2.$ Inconsistencies between company activities and the strategic guidelines set by management;

$3.$ Board or senior executives' lack of understanding of the complexities of the risks assumed by the company;

$4.$ Inappropriate capital structures, often with excessive dependence on external financing rather than equity;

$5.$ Misaligned financing with a company's project cycle;

$6.$ Excessive risks in treasury management;

$7.$ Dependence on a single source of funding, even when working with multiple providers;

$8.$ Weak relationships with finance providers;

$9.$ Poorly communicated internal and external governance structures, resulting in an overall lack of awareness or understanding of the company's corporate vision.

The finance function in companies is expected to grow in importance, with CFOs playing a vital role in formulating business strategy and providing support for sustainable value creation. However, this does not mean that finance directors will play a greater role. The finance function is the same as all other business functions, including production, marketing, human resources, technology, and innovation, all serving organizational objectives.

To provide visibility, transparency, and predictability, finance sector professionals must follow three important principles: clarity, vision, and caution. Clear, transparent accounts should be maintained, and financial information should be regularly provided to the CEO, board of directors, and external stakeholders. Managers should articulate a vision of the future to different stakeholders, and all departments must work together towards the same end.

The development of a vision requires understanding the business organization and providing a fully aligned financial structure that does not fluctuate in the medium term. Managers must set out what kinds of services are needed, how many are needed, and who can provide each type of service. The financial vision must extend to the relationship with the market, including immediate providers, direct customers, and other external factors that can influence financing capacity.

Short$-$term decisions should be based on rational assumptions and flexible enough to allow quick deviations from the original plan in light of new developments. Prudence is an inherent part of all financial management, and companies should care for all their providers, especially financial ones.

Managing cash flow and fun$-$time should be a cost center, aiming to minimize potential risks through the wise use of financial instruments. Care and caution must also be integral to the scenario$-$planning process, and value generation activities should be subject to sound judgments. In summary, corporate finance should return to supporting the company's core business activities through financing and sound financial advice, applying the principles of clarity, vision, and caution for a wiser and brighter future.