Long-term Financial Management

The funds which are not paid back within a period of less than a year are referred to as long term finance. Certain long term finance options directly form a part of the permanent capital of the firm. In such cases, the repayment obligation does not even arise. A 20 year mortgage or 10 year treasury bills are examples of long term finance. The primary purpose of obtaining long-term funds is to finance capital projects and carrying out operations on an expansionary scale. Such funds are normally invested into avenues from which greater economic benefits are expected to arise in future.

Long-term financial planning combines financial forecasting with strategizing. It is a highly collaborative process that considers future scenarios and helps governments navigate challenges. Long-term financial planning works best as part of an overall strategic plan.

Financial forecasting is the process of projecting revenues and expenditures over a long-term period, using assumptions about economic conditions, future spending scenarios, and other salient variables.

Long-term financial planning is the process of aligning financial capacity with long-term service objectives.

Financial planning uses forecasts to provide insight into future financial capacity so that strategies can be developed to achieve long-term sustainability in light of the government’s service objectives and financial challenges.

Sources:

Bonds

Bonds are debt instruments involving two parties- the borrower and the lender. The borrower can be the government, a local body or a corporation. They provide fixed interest payments at periodic intervals and are redeemable at a predetermined date in future. Bonds are normally issued against collateral and are therefore a highly secured form of long-term finance. Bonds may prove to be a very cost-effective source of funds in a bullish market.

Internal Accruals

Internal accruals are nothing but the reserve of profits or retention of earnings that the firm has created over the years. They represent one of the most essential sources of long term finance since they are not injected into the business from external sources. Rather it is self-generated and highlights the sustainability and profitability of the entity Also internal accruals are owner’s funds and therefore create no charge on the assets of the company.

Venture Capital

This form of financing has emerged with the growing popularity of start-up culture worldwide. VC firms invest into companies at their inception or seed stage. They are constantly on a watch out for firms demonstrating high growth potential. Their investment takes the form of ownership funds and forms a part of the permanent capital of the firm. Venture capitalists also have a predetermined exit strategy before they invest. This results in the target company being listed or a secondary sale to another VC firm.

Equity

Equity is the foremost requirement at the time of floatation of any company. They represent the ownership funds of the company and are permanent to the capital structure of the firm. The equity can be private or public. Private equity is raised from institutional or high net worth individuals. Public equity is raised by issuing shares to the public at large which are subscribed to by retail investors, mutual funds, banks and a pool of other investors. On the flipside, equity is an expensive variant of long term finance. The investors expect a high return due to the extent of risk involved.