What is Corporate Finance?
Corporate finance refers to preparing, developing, and conducting the capital financing structure of a business. Its primary objective is to augment the organisational value and profit via peerless decisions on equity financing, investment, financial model, and dividends.
It asserts capital investments that are targeted to address the funding necessities of a business, to pave the way for a preferable capital structure.
Understanding Corporate Finance
As per the latest market reports, around 77% of businesses rely on personal savings for their primary capital investment. It marks the need for corporate finance in the present business landscape.
Corporate finance departments are obliged to administer a firm’s equity financing and capital financing decisions. Such decisions encompass acknowledging a proposed investment or paying for it with debt, equity, or both.
Corporate financing also evaluates whether shareholders should get dividends or not and at what yield. Not to mention, corporate financing regulates current assets, liabilities, and inventory control too.
1. How does Corporate Finance Work?
Corporate finance highlights the need to magnify the financial potential of a company along with the stockholders. It is accountable for making pivotal decisions concerning capital budgeting, capital investment, financial model, and allocation.
Corporate financing evaluates the capital structure of an organisation. It also assures peerless working capital management by determining the profit distribution among shareholders while simultaneously setting the tone for profit maximisation.
2. Corporate Finance Principles
Here is a brief overview of the fundamental principles concerning corporate finance.
A. Investment Principle
This principle emphasises the prominence of investing in reliable options by assessing the risk. The analysis of a capital investment proposal should be influenced on a preconceived hurdle rate that must be set as a benchmark for return analysis. It is crucial to ensure that the capital acquiring cost does not counterweight the expected returns.
B. Financing Principle
The principle of capital financing stimulates the selection of financing methods to ensure maximum value is extracted from capital investment. The most vital concern is whether to use equity financing, debt financing or a mix of both.
C. Dividend Principle
The dividend principle highlights whether to integrate the surplus towards shareholders or growth in the shape of dividends.
3. Central Elements
Take a quick look at some of the critical principles that refer to this concept
A. Capital Budgeting
Capital budgeting displays the feasibility of investment proposals and sustains investment in profitable projects. The primary goal is to augment the profit ratio of the business by analysing the different investment alternatives.
It also conducts a proportional analysis of present investments and their future value to comprehend their risk-return aspects related to company goals.
B. Capital Structure
The capital structure, which includes retained earnings, equity, and debt, lists the financing methods used by an organisation. From the investor’s perspective, too much debt or equity will not help a business to thrive. Only an optimum blend of debt and equity capital funding can add to the company’s value.
C. Working Capital
It is the capital financing organisations need to run regular business operations. Only proficient financial management can ensure ample cash flows into the organisation according to the business’s policies. Consequently, with business liquidity, organisations can evade the possibility of bankruptcy.
D. Dividend Distribution
Public organisations are accountable to their respective shareholders. Hence, the issue of determining whether the business profit is to be distributed as dividends or not is always the primary question.
Types of Corporate Finance
The two types of corporate finance include:
Capital equity mostly comes in the form of preferred stock, common stock, etc. company can sell its shares via the OTC exchanges or get itself listed on a stock exchange to raise funds. Additional equity often downsizes the dividend share.
Debt financing means procuring finance via loans from financial institutions or bond issuance. Too much debt financing augments the possibility of the risk of default or bankruptcy during non-clearance of the debt.
Examples of Corporate Finance Activities
Corporate financing jobs comprise handling the communication between assets, investors, corporations, financial institutions, government, markets, and intermediaries.
Here is a list of examples of such activities:
- Financial Modelling: It helps to evaluate the risks and value concerning investment options properly.
- IPO: Also called Initial Public Offering, these help to raise capital investment via equity financing.
- Dividend Distribution: It depends on the management-set policy and can be regular or irregular.
- Bank Loan: Getting a bank loan to address the business requirements and concerning due diligence to determine the loan cost and repayment ability.
- Deferring and Refinancing all Payments and Debts: With the evolving market dynamics, companies may plan and negotiate to update the payment terms and agreements.
Corporate Finance Tasks
A. Capital Investments
Corporate financing entails making lucrative capital investments and managing the long-term capital financing of a company. Capital investment decisions are usually related to capital budgeting. Only via capital budgeting can a business:
- Categorise capital expenditures
- Differentiate probable proceeds with calculated investments
- Evaluates future cash flows from feasible capital projects
B. Capital Financing
Capital financing is accountable for sourcing capital in the form of equity or debt. A company may sell stocks to investors or borrow from banks as equity to sustain business expansions. In short, capital financing must deploy the capital required to apply capital investments.
C. Short-Term Liquidity
Short-term financial management is also one of the crucial tasks of corporate finance. Here the objective is to ensure the presence of adequate liquidity to execute business operations. Short-term financial management includes current liabilities, current assets, working capital, operating cash flows, etc.
What can Yubi do for your Corporate Finance Strategy?
Yubi’s financial modelling strives to acquire capital finance from suitable sources to address your short-term and long-term financial requirements. From strategising appropriate capital budgeting to maximising capital value, Yubi maintains the perfect balance between risk and profitability.
Furthermore, evaluates the cash flows via capital budgeting tools and enhances the statistics on financial statements, eventually maximising the stock price.
Corporate finance is the practice of acquiring and handling capital finances for optimum business growth and maximising shareholder’s profit. It primarily focuses on financing, investment, and the dividend principle.
Yubi’s corporate finance professionals provide complete assistance and support with the primary elements of corporate financing, like capital structure, capital budgeting, dividend decisions, and working capital management.
Corporate finance helps organisations make proficient business decisions for a progressive financial outcome.
Here are the 3 main areas of corporate finance:
- Capital structure
- Capital budgeting
- Working capital management
A company’s capital structure (both equity and debt) is essential to augment the business value significantly. A company with hugely funded debt has a more aggressive capital structure and hence, is highly risky for stakeholders.