What is Corporate Finance?
Corporate finance involves financial activities dealing with the utilization and distribution of wealth to sustain a company’s capital & economic structure. This specialized area of finance manages investment funding aspects to move towards steady wealth generation, thus helping the company experience relentless development. Corporate finance is a subfield of finance that plays a vital role in every business. It deals with how corporations address funding sources, capital structuring, accounting, and investment decisions.
Whatever the size/type of business operations, every company aims to streamline its corporate financing arm for optimal wealth distribution and return generation. Furthermore, corporate finance is also concerned with maximizing shareholders value through long and short-term financial planning and the implementation of various strategies — the activities under corporate finance span from capital investment to tax considerations.
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Scope of Corporate Finance
The scope of corporate finance refers to the various objectives and responsibilities under the corporate financing sector. The objectives primarily focus on maximizing the company’s sustainable expansion and wealth generation, as summarized below:
- Keeping expenditures in check by capital budgeting while allocating only the most profitable projects.
- Market analysis to keep up with the rapidly changing trends by accumulating the same practices.
- Making decisions only after in-depth market research around raising funds from the capital market through trustworthy and most effective sources.
- Take up advisory roles in case of mergers, acquisitions, and takeovers.
- Undertaking an analysis of different investment options using fundamentals of corporate finance to redeem an optimal mix of the most efficient financing instruments.
- Taking decisions to diversify and expand according to the growth of the company.
Types of Corporate Finance
Types of corporate finance are the various methods of raising funds for the business. The two main types/divisions suitable for boosting funds for the company are –
- Short-term Corporate finance
- Long-term Corporate finance.
- Short-term Corporate finance- Corporate finance loan is extended to a company for a short period of a few months (or a maximum of one year) is short-term finance. Short-term corporate finance loan includes the following –
- Financial lease: In this type of corporate finance, the financial entity is the asset owner until the lease is paid back. In some cases, companies also own the operating control over the assets until full payment on time is made.
- Trade Credit: Usually, trade credit is a part of the B2B structure. It is an agreement where clients can purchase any offered goods while paying the supplier at a scheduled date later.
- Accrual accounts: The accrual method of accounting is followed in this type of corporate finance. It enters the sale at the time of invoice generation rather than when the cash is received.
4. Long-term Corporate finance- Corporate financial loan or aid spreading over a year or more is long term corporate finance. Long-term corporate finance loan includes the following –
- Debentures: A type of bond, the debt instrument used by big corporations and governments that agree to borrow finance with a fixed interest rate. Due to the lack of collateral backing, the entity’s reputation that issues the bonds is the only aspect to rely on for obtaining the principal amount and interest.
- Bank Loan: This is the most common financing option that almost every other company relies upon to structure its expansion. They can pick from medium to long-term financing options depending upon their needs.
- Floatation: Refers to converting a private entity into a public one by issuing shares for the general public. This type of corporate financing ensures obtaining funds from external means rather than depending upon earnings and new projects for maximizing the corporation.
Principles of Corporate Finance
Three main principles of corporate finance to boost the company’s value are:
- Investment Principle: This principle warrants the usage of scarce financial resources to make the most efficient decisions. A company must properly allocate finances keeping the potential opportunities in mind. The investment must be made to secure a stable flow of economic opportunities while keeping funds in check for future use.
- Financing Principle: Orchestrating a business structure needs capital, a mix of debt and equity. This principle deals with reaching an optimal blend of many financial instruments while keeping the future implications under vigilance.
- Dividend Principle: Due to relentless participation in investment opportunities, companies where generated cash flow surpasses the existing investments and hurdle rate – companies try to find out the proper ways to reward investors and repay debts. Companies can either utilize the excess cash to pay off or expand their businesses.
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Q: What is the main objective of corporate finance?
A: The primary objective of corporate finance includes making sound financial decisions to improve the monetary impact by implementing sustainable goals, benefiting both the shareholder and the organization. It uses proven tools and analysis to achieve sustainable growth rather than a mere momentary profit.
Q: How is financial management different from corporate finance?
A: While financial management deals with the day-to-day optimization of the cash flow, corporate finance aims to maximize the worth of a company by analyzing and decision-making. Although both are pertinent to the finance division of any company, they deal with purely opposing duties.
Q: What is the role of corporate finance in an organization?
A: The role of corporate finance in an organization is to manage the responsibility relevant to capital raising, managing finances for projects, dealing with Mergers and Acquisitions (M&A), financial monitoring, and several other/associated complicated tasks.