Corporate financial planning in public versus private firms

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).

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).

Ownership Structure and M&a

As already referred to from prior research, ownership structure has a demonstrable effect on capital structure decisions as well as the broader topic of corporate financial planning and this is especially true in smaller and/or private firms that have a fairly small (if not a single) owner rather than a group of shareholders who collectively have power to make, or at least affect, decisions made. Public firms in particular are subject to hostile takeovers and this often leads to the use of tactics such as poison pills and other mitigating measures as a disparate group of shareholders could be swayed much more easily in a public firm as compared to a private firm with very few owners that have no interest in being taken over. Regardless, countermeasures used to avoid or block a takeover certainly have an effect on the capital structure of a firm as it is an integral part to a firm's long-term financial planning portfolio (Gorton & Kahl, 2008).

Conclusion

In conclusion, firms need to be vigilant in careful in their corporate financial planning decisions for the short- and long-term time horizons. They must make sure their capital structure takes advantage of opportunities while not opening up the firm to dangerous conditions. It is a balance act that must be done carefully