What Are the Different Ways to Reduce Cost of Capital?

The cost of corporate funds refers to the weighted average of the costs of various types of funds, including debt funds and equity funds. When the profit rate of the company s own funds is equal to the cost rate of borrowed funds, the fund-raising income is equal regardless of the form of the fund structure; when the company s operating income is lower than the point of no difference in financing, increasing the proportion of its own funds will increase the efficiency of fund-raising and There are capital profit margins. Reducing corporate capital costs can maximize corporate value.

Cost of capital

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The cost of corporate funds refers to the weighted average of the costs of various types of funds, including debt funds and equity funds. When the profit rate of the company s own funds is equal to the cost rate of borrowed funds, the fund-raising income is equal regardless of the form of the fund structure; when the company s operating income is lower than the point of no difference in financing, increasing the proportion of its own funds will increase the efficiency of fund-raising and There are capital profit margins. Reducing corporate capital costs can maximize corporate value.

Chinese name

Cost of capital

Types of

economic

Main body

Various funds

Object

Debt and equity capital costs

I. Reducing the cost of capital of enterprises is the fundamental way to determine the maximum economic benefits of enterprises ^[1]

(1) Reducing the capital cost of an enterprise can maximize the value of the enterprise.

The purpose of enterprise production and operation is to maximize profit. To pursue profit maximization, costs must be minimized. The key point to reduce costs is to reduce production costs. Production costs are a concentrated reflection of the quality of economic operation of the enterprise. The quality of management is the comprehensive performance of the overall quality of the enterprise. To evaluate the pros and cons of an enterprise, it is necessary to examine its cost level. There are many factors that affect the cost of a company. But among the factors that an enterprise can control, the most important thing is to see whether effective cost management is carried out. Therefore, no matter how the focus of the company's work shifts, the work of reducing costs cannot be relaxed. It is necessary to strengthen the cost awareness of the company, attach importance to the strategic cost management and process cost management of the enterprise, and take various effective measures to reduce the cost of the product so as to maximize the value of the enterprise.

(2) Reducing the cost of capital for enterprises is required to participate in market competition.

With the advent of economic globalization and intensified market competition, manufacturing companies are facing new opportunities and challenges. Manufacturing companies in developed countries in the world are constantly shifting to developing countries with low labor costs. Low labor costs have gradually become the center of the world's manufacturing industry, winning the reputation of "world factory" and "made in China" swept the world. With the rapid expansion of market demand, domestic enterprises have moved from the "manual workshop" and "small batch" production mode to the "mass production" mode. The increasingly fierce market competition has also made enterprises in traditional "open source and throttling" measures. In addition, it is necessary to deeply dig the overall reduction of costs as a systematic project, establish a systematic management concept of costs and a cost management system, study the cost management method with the concept of development, and analyze the ways to reduce costs with a strategic perspective. Innovate cost management methods to meet the needs of market economy development under the new situation.

(3) Reducing capital costs is the fundamental way for enterprises to improve economic benefits.

The use of certain measures to reduce costs is closely related to the increase in profits, and reducing costs means an increase in profits. Although reducing costs can increase profits, they are not proportionally increased. Generally, the cost reduction is greater than the profit increase, that is, the cost is reduced by 10%, and the profit may be increased by 20% or more. many. Some people think that increasing sales is the main way to increase profits, but it requires a certain price. But reducing costs doesn't require spending money or spending very little money. Therefore, for the managers of enterprises, the focus of increasing the economic benefits of enterprises should be on the link of reducing costs. Due to the shackles of concepts, many managers paid insufficient attention to this issue and did not adopt corresponding comprehensive cost reduction plans. I think that the daily operation and management work is enough, and there is very little time for cost reduction work and planning. They focus their work on the sales of products, which are considered to directly reflect economic benefits, and believe that this can make the production of enterprises smoothly. However, whether such work can really bring direct economic benefits to enterprises, they have not conducted real research. It should be considered that sales and other work are just a form of realization, and the real benefit to the enterprise is in the production link. If measures are not taken to reduce costs in the production process, the economic benefits of the enterprise cannot be really improved.

Second, reduce the capital cost of enterprises, and promote enterprises to move towards modern management

(1) Strengthen strategic cost management and strive to improve management innovation and technological progress.

First of all, our products lack real competitive advantages. The reasons are that the production scale is not economical, the investment in production and construction is high, and the energy and material consumption of the products are high. These factors basically ignore strategic cost management in the product design and plant construction process. As a result, they have a far-reaching impact on costs and are difficult to change in the process of production and operation. In future decisions, we should attach great importance to strategic cost management and make strategic cost management a necessary process for decision-making. Secondly, although we have policies that encourage innovation, such as the Rationalization Proposal Award and the Technological Progress Award, these policies are implemented differently by different companies, with unscientific standards and even formalities. In the past, we put more emphasis on the resilience of enterprises, but the resilience was adaptation rather than innovation. Therefore, we should vigorously promote the innovative spirit of enterprises, improve the conversion rate of scientific research results, make it into productivity as soon as possible, and finally achieve obvious cost-effectiveness.

(2) Strengthen quality awareness and improve cost management.

For contemporary enterprises in the tide of market economy, quality can be said to be the life of an enterprise. A good company cannot ignore the quality of its products at all times, especially when the supply exceeds demand. If the overall and long-term interests of the enterprise can be taken into account, improving quality and reducing costs are unified, and there is no contradiction between the two. At the same time, the fundamental purpose of being an enterprise is to obtain as much output as possible while making the input value as small as possible. This is to find an optimal combination point through the production function and the price of the input, so that the enterprise forms an optimal production scale. Because the period of change in the production factors of the enterprise is different, we should explain the situation in different periods. If it is in the short term, the main consideration is to change the production factor so that the enterprise can produce at the lowest point of the short-term average cost curve to achieve the short-term minimum cost. The condition is that the average output of variable production factors is equal to its marginal output, or the short-term average cost is equal to marginal cost. If it is in the long run, all factors of production should be considered to enable the enterprise to reach the optimal production scale or achieve economies of scale. If the production scale of the enterprise exceeds the lowest point of the long-term average cost curve, the scale of the enterprise is too large; if the production scale of the enterprise is less than the lowest point of the long-term average cost curve, it indicates that the scale of the enterprise is too small. Economic requirements.

(3) Reasonable selection of funding channels and methods, and reasonable arrangement of funding deadlines.

First of all, there are various channels and ways for enterprises to raise funds, but no matter which channel or method they use to raise funds, there must be a certain cost of capital. For example, a loan to a bank requires payment of interest on borrowings and a fee for borrowing. Issuance of stocks and bonds requires payment of dividends and interest on bonds in addition to the issuance of stocks and bonds. The use of capital invested by parties to a joint venture Pay dividends to investors. Different funding sources form different capital costs. Even for the same funding source, the cost of capital will be different due to different funding methods. Therefore, companies should carefully compare the cost of capital from various sources of funding, choose channels and methods of financing properly, and strive to reduce the cost of capital. Secondly, the raising of corporate funds is mainly to meet the needs of investment, especially to meet the needs of long-term investment. In this case, the principle of "investment" and "funding" must be adhered to, and the funding period must be subject to the investment period and capital budget. The longer the investment period, the longer the funding period is required. However, because investment is often carried out in stages and in different periods, when raising funds, enterprises can reasonably arrange the funding period according to the progress of the investment, which can reduce capital costs and reduce unnecessary idleness of funds.

(4) Reasonably arrange the capital structure, strive to reduce the cost of comprehensive capital, and strive to improve corporate reputation.

First of all, in the capital structure decision, it is very important to arrange the debt capital ratio and the equity capital ratio reasonably. In general, the cost of equity capital is greater than the cost of debt capital, because the interest rate on debt is usually lower than the interest rate on stocks, and debt interest can be paid before tax, which has a tax deductible function. Therefore, a reasonable increase in the debt-to-capital ratio and a reduction in the equity-to-capital ratio within a certain limit can comprehensively reduce the comprehensive capital cost of the enterprise, which can bring financial leverage benefits to the owner and increase the value of the company. However, if a company is blindly pursuing a reduction in the cost of capital, resulting in a large debt scale, it will inevitably make the interest expense borne by the company too large, and then a financial crisis will occur. Therefore, enterprises must maintain a reasonable capital structure and reduce the pressure on debt service. Second, strive to improve corporate reputation and actively participate in credit rating assessments. The vast majority of enterprises in our country do not pay much attention to the establishment of corporate reputation, and adopt an indifferent attitude towards credit ratings, which is very detrimental to the establishment of their own financial image. To improve their credit rating, companies must first actively participate in rating assessments, let the market understand the company, and let the company go to the market. Only in this way can it facilitate the financing of future capital markets and increase investor confidence in investment. Actively and effectively obtain funds to reduce capital costs. In short, with the rapid development of China's economy, when enterprises expand their production and operation scale, the demand for capital will inevitably increase. Therefore, the level of capital cost directly affects the economic benefits of the enterprise. How to reduce the cost of capital and maximize the benefits of capital has become an important issue that enterprises have shared concerns and must consider.