Survival of a corporate in the fast changing world depends upon adopting suitable strategies.

The combined operation of strategies in all four major functions, Marketing, Operations, Finance, and HR is essential for success. Over the years finance function has emerged from the mere record keeping operation to full active participant in strategy formulation and execution. The basic purpose of a corporate is to enhance the value. Finance function enables maximization shareholder value through its activities.. The principal occupation of finance function covers: 1. Profit Maximization 2. Short term and long term solvency and 3. Efficient Risk Management There are various stakeholders for a corporate entity, whose goals often clash. However there is one principal goal with which all agree: that the returns the corporate generated should be high. Returns on investment are related to risk. Higher the risk, higher the return expectations. What are the returns for an investor: 1. The stream of cash inflows 2. The value growth of the instrument held. What are risks: Risk is the volatility or uncertainty of the returns in terms of its regularity, its volume, periodicity etc. Risks are of two types,viz., 1.Business Risk and 2. Financial Risk 1. What is Business Risk? Business Risk is that part of uncertainty that is essentially Market Oriented. Some of these are: Product Risk, Market Acceptance, Market Share, Size of market at maturity, Length of Maturity period, Maintenance of Market Share, Rate of Eventual Decline, etc. These can be plotted along the Product Life Cycle. All the above risks are present at the launch stage. During the different stages later on some of these are overcome. As you would see in the graph below an investor would expect some return even at zero risk . That is the rent or price he expects to be paid for sparing liquid cash . And as the risk perception of a particular investment increases the expectation of the reward or returns also increase.

2. What is Financial Risk? It is the volatility of the rate of returns. The returns on debt and equity differ in nature. The interest paid on debt is a fixed expenditure. Irrespective of the volume of profits this fixed expenditure has to be met. Only the balance available after paying this fixed charge is available distribution as dividends. So the volatility/ uncertainty of dividends increases with increasing levels of debt capital and vice versa. So:- Higher Dependence in Debt- Higher Finance Risk. Higher Dependence on Equity- Lesser Finance Risk. Summarizing: Business risk determined by the competitive environment. Finance risk depends upon the capital structure. The management should consider both risks in combination. These should be used in so that when one type of risk is high the other should be low. If both risks are high the possibility of the company collapsing will become high. If both risks are low it is probable that the returns would also be low. During the initial stages obviously the market risk in other words Business risk would be high. It would not therefore be advisable to add financial risk also. The business takes better grip over the markets and moves to the Growth stage and thereon to Maturity stage leading finally to Decline stage.

The net cash flows during the four stages are as given in the four quadrants below. Considering the cash flows and combinations of Business and Financial Risks different Financial strategies can be adopted to ensure continued sustainability of the company. These would include when to induct what kind of funding to support the business Equity Capital or Loan Capital (Preference shares, Debentures, Bonds, Long tern Loans etc); what kind of returns Interest payments and Dividends and in what quantum can be decided; following that what are the growth prospects for the business and consequent market responses (Security market not product market) to the shares of the company . An appreciation of these would enable the management to take appropriate strategic steps. The cash flows and the various other parameters are indicated in the diagrams below: