Company Valuation
Company Valuation
Two main factors resulting to discrepancies between an asset’s book value and market value are inflation and liquidity. For any organization, financial statements are indispensable historical documents that provide financial position of organization at some past time. Several factors affect a company’s financial position. These factors include opinions of investors, fast-changing conditions in the market and prevalence value (Garger, 2012).
Within an organization’s settings, inflation largely affects the gap between asset’s book and market values. Inflation is consistent considerable augment in base price levels linked to elevation in money volume thereby lost currency value. This implies that, as money penetrates a monetary system the increase in circulating money is compensated by increased prices (Brayant, 2012).
As a result, a person has to pay more for the purchase of something compared to lack of inflation. Inflation related changes in market prices result to asset market changes to reimburse for the transformation. This indicates that the buying power is affected, and the longer an asset is within the organization the more the dollar deflates with time. Organizations should remain aware of deflation to avoid overvaluing their assets. This way, managers ensure that investors are aware of how inflation affects market value. The snapshot summary of the financial position of an organization is provided by its financial statements (Garger, 2012).
This comes in form of a historical perspective. Liquidity is a market condition that affects a company’s value. Liquidity is the capacity to sell an asset with the least value loss. Short term investment can be sold or bought with few costs of transactions. Long term assets are less valuable compared to short term asset and require high costs of transactions. This makes it difficult to turn into cash. Cash is relevant as it assists organizations to realize their full value. Managers must always look out for financial distress situations and tactfully turn assets into cash prior for survival and avoid bankruptcy.
Ensuring company survival in the face of company closure
In the face of financial crisis, the CFO and the human resource can evaluate the cost needed to survive for the next two years before selling available liquid assets that may not have immediate use. This would mean that the CFO and the HR comes up with the list of all organizational liquid assets and sell them (Janssen, 2008).
The survival of an organization depends on its liquid assets especially when the future of the organization is promising through upcoming products or services. Highly liquid assets can easily be turned into cash which mean that a company can survive economic hard times. Another strategy to adopt would be to use is company restructuring to ensure there is no running out of cash. Organizations are required to take control of their spending (Ruiz, 2009).
For survival reasons, organizations should cut down on costs and require that all money spent in the business is authorized (company restructure, 2012). All unnecessary payment should be stopped except the payroll. This implies that no vendor should be paid to allow the CFO to come up with cash forecast and a vendor payment plan. Cash forecast will require the managers to come up with the possible sources of cash and possible expenditure for the collected money (Ruiz, 2009).
The vendor payment plan is a plan indicating all indebted vendors and the amount of money intended for payment to each during the economic hard times. In order to avoid inconveniencies, the CFO or the HR must call the vendors to inform them of the plan. Where possible, the company can also use the strategy of cutting down operations and headcounts to meet the available cash (Ruiz, 2009). This is similar to identification and elimination of valued employees and operations viewed as unproductive.
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