What is corporate finance?
Corporate finance is the subfield of finance that deals with how businesses approach sources of finance, capital structuring, accounting, and investment decisions.
Corporate finance is often aimed at maximizing shareholder value through long and short term financial planning and the implementation of various strategies. Corporate finance activities range from capital investment to tax considerations.
Key points to remember
- Corporate finance is concerned with how companies finance their operations in order to maximize profits and minimize costs.
- It deals with the day-to-day cash flow operations of a business as well as long-term funding goals (eg bond issuance).
- In addition to capital investments, corporate finance deals with cash flow monitoring, accounting, financial statement preparation, and taxation.
Understanding corporate finance
Corporate finance departments are responsible for governing and overseeing their businesses’ financial activities and capital investment decisions. These decisions include pursuing a proposed investment and paying for the investment with equity, debt, or both. They also indicate whether shareholders are to receive dividends and, if so, at what dividend rate. In addition, the finance department manages current assets, current liabilities and inventory control.
A company’s financial tasks are often overseen by its chief financial officer (CFO).
Corporate finance tasks
Corporate finance tasks include making capital investments and deploying a company’s long-term capital. The capital investment decision process is primarily concerned with capital budgeting. Through capital budgeting, a business identifies capital expenditures, estimates future cash flows from proposed capital projects, compares planned investments to potential revenues, and decides which projects to include in its capital budget.
Making capital investments is perhaps the most important business financing task that can have serious business implications. Poor capital budgeting (for example, excessive investments or underfunded investments) can jeopardize a company’s financial position, either due to increased financing costs or inadequate operating capacity.
Corporate finance includes activities related to financing, investing, and capital budgeting decisions of a business.
Corporate finance is also responsible for raising capital in the form of debt or equity. A firm may borrow from commercial banks and other financial intermediaries or may issue debt securities in the capital markets through investment banks. A company may also choose to sell stocks to equity investors, especially when it needs significant capital to grow its business.
Equity financing is a balancing act in terms of deciding the relative amounts or weightings between debt and equity. Having too much debt can increase the risk of default, and relying heavily on equity can dilute earnings and value for early adopters. Ultimately, capital financing must provide the capital needed to implement capital investments.
Corporate finance is also responsible for short-term financial management, where the goal is to ensure that there is sufficient liquidity to carry out ongoing operations. Short-term financial management concerns current assets and liabilities or working capital and operating cash flows. A business must be able to meet all of its liability obligations when due. It’s about having enough short-term liquidity to avoid disrupting a business’s operations. Short-term financial management may also involve securing additional lines of credit or issuing commercial paper as cash reserves.