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Corporate Finance Definition and Activities
Corporate Finance Definition and Activities

Corporate Finance Definition and Activities

What Is Corporate Finance?

Corporate finance is a subfield of finance that deals with how corporations address funding sources, capital structuring, accounting, and investment decisions.

Corporate finance is often concerned with 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 Takeaways

  • Corporate finance is concerned with how businesses fund their operations in order to maximize profits and minimize costs.
  • It deals with the day-to-day demands on business cash flows as well as with long-term financing goals (e.g., issuing bonds).
  • Corporate finance also deals with monitoring cash flows, accounting, preparing financial statements, and taxation.
  • Determining whether or not to issue a dividend is another corporate finance activity.
  • Corporate finance jobs can pay attractive salaries.

Understanding Corporate Finance

Corporate finance departments are charged with managing their firms’ financial activities and capital investment decisions. Such decisions include whether to pursue a proposed investment and whether to pay for the investment with equity, debt, or both.

They also include whether shareholders should receive dividends, and if so, at what dividend yield. Additionally, the finance department manages current assets, current liabilities, and inventory control.

A company’s corporate finance activities are often overseen by its chief financial officer (CFO).

Corporate Finance Activities

Capital Investments

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 company identifies capital expenditures, estimates future cash flows from proposed capital projects, compares planned investments with potential proceeds, and decides which projects to include in its capital budget.

Making capital investments is perhaps the most important corporate finance task and can have serious business implications. Poor capital budgeting (e.g., excessive investing or under-funded investments) can compromise a company’s financial position, either because of increased financing costs or inadequate operating capacity.

How to Successfully Handle Your Company’s Finances

Corporate financing includes the activities involved with a corporation’s financing, investment, and capital budgeting decisions.

Capital Financing

Corporate finance also involves sourcing capital in the form of debt or equity. A company 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 large amounts of capital for business expansions.

Capital financing is a balancing act involving decisions about the necessary amounts of debt and equity. Having too much debt may increase default risk, and relying heavily on equity can dilute earnings and value for early investors. In the end, though, capital financing must provide the capital needed to implement capital investments.

Short-Term Liquidity

A corporate finance department is also tasked with short-term financial management. The goal is to ensure that there is enough liquidity to carry out continuing operations. Short-term financial management concerns current assets and current liabilities, or working capital and operating cash flows.

A company must be able to meet all its current obligations when they are due. This involves having enough current liquid assets to avoid disrupting a company’s operations. Short-term financial management may also involve getting additional credit lines or issuing commercial paper as liquidity backup.

Working in Corporate Finance

Positions in the area of corporate finance attract many job seekers. In fact, there’s typically great competition for many of these types of jobs. Some of the many corporate finance job titles include:

  • Chief financial officer
  • Financial planning and analysis manager
  • Cost analyst
  • Financial analyst
  • Treasurer
  • Corporate accountant

Corporate finance salaries can vary among companies. However, according to top job site, Indeed, the national average annual salaries for the positions noted above are:

  • Chief financial officer: $133,898
  • Financial planning and analysis manager: $113,770
  • Cost analyst: $83,304
  • Financial analyst: $71,556
  • Treasurer: $80,428
  • Corporate accountant: $66,515

What Does Corporate Finance Do?

Corporate finance departments in companies focus on solid decision-making for profitable financial results. Thus, corporate finance involves activities that relate to the budgeting of capital, the debt and equity used to finance operations, management of working capital, and shareholder dividends.

What Is Corporate Finance vs. Finance?

Corporate finance is one of the subfields of the overall finance category. The others include public (or government) finance and personal finance.

What Are the 3 Main Areas of Corporate Finance?

The main areas of corporate finance are capital budgeting (e.g., for investing in company projects), capital financing (deciding how to fund projects/operations), and working capital management (managing assets and liabilities to operate efficiently).

The Bottom Line

Corporate finance is a subset of the field of finance. It concerns proper budgeting, raising capital to meet company needs and objectives with debt and/or equity, and the efficient management of a company’s current assets and liabilities. The various jobs in corporate finance can pay well.

Source

Crafting a Strong Financial Plan: Key to Business Success

Crafting a Strong Financial Plan: Key to Business Viability and Financing Success

The financial plan plays a crucial role in determining the viability of your business idea and securing financing. It provides a clear overview of costs and funding requirements, making it an essential tool for convincing financiers to invest in your venture.

Creating a financial plan doesn’t have to be complex; you can base it on your business plan and keep it simple. Market research and a well-thought-out marketing plan should be integral parts of your business plan, providing a solid foundation for your financial projections.

While seeking input from an expert like an accountant is valuable, it’s important to work out as much of your financial plan as possible on your own. This preparation will help you when approaching financiers or investors for funding.

A comprehensive financial plan typically includes five budgets that outline the minimum requirements for starting your business, the necessary investments, and how you plan to finance them. These budgets enable you to assess the viability of your business idea, estimate your projected turnover, evaluate profitability, and examine cash flow to ensure you have sufficient funds each month. Addressing these key aspects in your business plan is crucial for success.

1. Investment budget: This budget should list the investments required to launch your business, differentiating between immediate and delayed investments. It provides an indication of the minimum funding needed to get started.

2. Financial budget: The financial budget outlines how you plan to finance your investment budget, including options such as personal capital (equity capital), loans (borrowed capital) from a bank, or a combination of both.

3. Operating budget: The operating budget demonstrates the profitability of your business. It helps estimate your expected turnover and analyze the costs associated with running your business. By combining these factors, you can determine whether your business will generate a profit or incur a loss.

4. Cash flow budget: Income and expenditure can fluctuate throughout the year. Creating a cash flow forecast allows you to track all inflows and outflows over a specific period, such as monthly or quarterly. This helps identify periods of surplus cash and potential shortfalls, enabling better financial management.

5. Personal expense budget: This option involves assessing your personal financial situation and determining the amount of personal capital available. Calculate your personal expenses, including taxes and operational costs, to establish the minimum turnover required to meet your financial needs.

Financial Statement Analysis: How It’s Done, by Statement Type

When evaluating a credit application, financiers consider both “hard” factors related to your business and its foundation, as well as “soft” factors associated with you as a business owner. To increase your chances of success, prepare a well-structured presentation that showcases your familiarity with the financier’s requirements and language.

Financiers typically evaluate:

– Business owner assessment, including qualities and experience.
– Quality and financial basis of the business plan.
– Company history, such as turnover, gross profit, and cash flow.
– Industry trends and developments.
– Loan type, size, and duration.
– Purpose of the loan.
– Clear budget and understanding of financial obligations.
– Comprehensive understanding of the business’s cost structure.
– Repayment capacity without jeopardizing the business.
– Potential for future business growth.
– Financial structure and personal expenditure.
– Market analysis conducted by an independent body.
– Market research and industry information.
– Offered security to ensure repayment.

When writing your financial plan to secure investment, it is important to make a positive first impression. Create a compelling presentation that demonstrates your understanding of the financier’s requirements and uses appropriate language and visual aids. Incorporate an introduction, tables, visuals, and consider graphic design elements to enhance readability.

Additional tips to improve your financial plan and increase your chances of success include using your own equity to finance the business, negotiating favorable financing terms and conditions, supporting your application with a pitch, and exploring various financing options available to you.

 

For More you can check: Financial Statement Analysis: How It’s Done, by Statement Type