The Functions of Financing: A Comprehensive Guide

In today's global economy, corporations face the challenge of managing their internal markets to build a competitive advantage. This task falls on the shoulders of CFOs, who must balance the opportunities and challenges of operating in multiple environments. One key aspect of this role is the function of financing, which plays a crucial role in creating value for the company.

Financing involves various activities that CFOs can leverage to maximize the company's financial performance. Let's explore the three main functions of financing in more detail:

1. Financing for Tax Optimization

One of the primary functions of financing is tax optimization. CFOs can strategically borrow in countries with high tax rates and lend to operations in countries with lower rates. By doing so, they can reduce the group's overall tax bill. However, it's essential for global CFOs to be mindful of the downsides of strategic financing. For example, saddling subsidiary managers with debt can cloud their profit performance and hinder their ability to meet targets.

2. Risk Management through Internal Operations

Rather than relying solely on financial markets to manage currency exposures, global firms can offset natural currency risks through their worldwide operations. This function of financing helps mitigate risks associated with fluctuating exchange rates. However, it can also obscure the performance of local units, making it more challenging for headquarters to evaluate local managers and easier for financial managers to take speculative positions.

3. Capital Budgeting and Valuing Investment Opportunities

CFOs can add value to the organization by becoming smarter about valuing investment opportunities. By adopting robust capital budgeting techniques, they can identify and prioritize high-value projects that align with the company's objectives. However, CFOs must strike a balance to avoid an overly formal approach, which may incentivize managers to manipulate the system and pursue outcomes that conflict with the company's goals.

To make the most of these financing functions, global finance operations must adapt to institutional variation and align with organizational goals. This can be achieved by locating decision making at a geographic level where strategic decisions are made, rotating finance professionals through different institutional environments, and codifying practices that can be adjusted to suit local conditions.

Additional Functions of Financing

While the three functions mentioned above are crucial, there are other functions of financing that contribute to a company's financial success. These include:

• Financial planning and forecasting
• Cash management
• Determining the capital structure
• Funding sources
• Forecasting cash flows
• Income distribution
• Investing the business capital
• Financial command
• Pricing and price control
• Utilizing and allocating financial resources
• Financial reporting
• Management of risk

By effectively executing these additional functions, CFOs and finance professionals can optimize the company's financial performance and contribute to its overall success.

Conclusion

The functions of financing play a vital role in the success of a global corporation. CFOs have the power to optimize tax strategies, manage risk, and evaluate investment opportunities. By leveraging these functions effectively, CFOs and finance professionals can create value and contribute to the company's long-term growth.