This will allow for the development of a financial plan.
Forecasting allows a company to make good decisions regarding its business model. It allows the management to resolve the dilemma of greater shareholder expectations and demanding customer requirements Palmatier, n.d ()
. Any company that is striving to achieve operational excellence, and gain competitive advantage will need to perform continuous forecasting in order for it to satisfy its customers and manage its resources.
Current conditions of fixed income and common stock securities
Fixed income is a type of investment where the borrower has to pay a fixed amount at a specific time Dwyer & Tkac, 2009.
Fixed income has to be paid whether the company is making a profit or not because there is an agreed payment schedule. If the borrower is misses to make a single payment on the fixed income, the payees can use the relevant law to force the issuer to pay or declare bankruptcy.
Fixed income securities are usually considered to have lower returns or profits on the investment because they have lower risks. This is because the borrower is obligated to pay the fixed income even when the company is making a loss. They have lower risks because the repayments are scheduled and there is a specific number of payments the payees can expect. Fixed income securities have to be planned for to ensure that no payment is missed. This would mean a company will have to direct its finances to paying the fixed income first before it can consider making other financial obligations.
Common stock securities refer to ownership of a company through shares. Commons stock securities do not have to receive any payment at a specific time. Payment is dependent on the company making high profits. This payment referred to as dividend will be made after fixed income securities have been paid and preferred shareholders paid too. If the company makes minimal profits or none, then the common stockholders will not receive any dividend. This security is considered to have high risks and high returns. This is because there is no guarantee of a dividend been issued but when a dividend is issued it usually has high returns on the investment made.
In financial management common stock securities have no major impact because they are dependent on the company making high profits. Though this might be the case, the CFO will need to ensure the company remains profitable, and dividend issued to ensure the company's stock price does not fall due to massive sell out by the stock holders.
Risk and return and its role in financial management
Risk and return is a vital aspect of a CFO's core responsibilities in a company. The greater financial risk a company exposes itself to, the higher its chances of achieving high financial returns. These risks have to be rational and correspond to high returns. Volatility of securities is one way the CFO can use to measure the averages of stock prices in given time periods. The higher the volatility is, the higher the uncertainty. This uncertainty can translate into greater returns for the company.
Risk premium is used by CFO's when they want to borrow money. They work on the concept that is everything remains equal, then a higher risk will be accompanied with higher returns. For financial management, risk premium is important because majority of lenders will look at how risky it is when basing their decision to loan money to the company. However, when a lender agrees to loan money to a business they consider risky, they will demand a higher return normally higher rates of interest. The CFO will need to worry about the interest rates that the company pays its lenders. This is because the interest rates could significantly put a strain on the cash flows of the company, and this could result in defaulting of loans and bankruptcy declaration for the company.
Bertoneche, M., & Knight, R.F. (2001). Financial Performance. Maryland Heights, MO 63043: Elsevier Science & Technology Books.
Dwyer, G.P., & Tkac, P. (2009). The Financial Crisis of 2008 in Fixed Income Markets. Working Paper. Federal Reserve Bank of Atlanta. Retrieved from https://erms.tourolib.org/url/http://search.ebscohost.com/login.aspx?direct=true&db=a9h&an=44452120&site=ehost-live
Palmatier, G. (n.d). Forecast Measurement and Evaluation, from http://georgepalmatier.com/white-papers/whitepapers_forecast_measurement_evaluation_white_paper.pdf
Paramasivan C., S.T. (2009). Financial Management. New Delhi-110-002, INDIA: New Age International (P) Limited.