Corporate Finance - Explained
What is Corporate Finance?
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Table of ContentsWhat is Corporate Finance?How Does Corporate Finance Work?Capital Investment DecisionsCapital FinancingLiquidation in Short-Term
What is Corporate Finance?
In a firm or organization, corporate finance is that part of the business which focuses solely on financial and investment decisions. This department is primarily concerned with the maximization of shareholder value via short and long term financial strategies and through the application of various plans and methods. Corporate finance is quite like personal finance, except that it is tailored specifically to businesses and takes on activities related to decisions on investment of capitals and investment banking.
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How Does Corporate Finance Work?
These divisions are usually giving the tasks and power to control and supervise a company's financial activities and exercises, as well as its capital investment plans. These plans can consist of whether the company in question should embark on a project or indulge themselves with an investment, and whether to pay for such investment using securities or debt instruments, as well as mixing both payment systems to create something more like a hybrid payment. This department also decides if shareholders should receive dividends for the fiscal year. Also, corporate finance departments have total control over the assets, liabilities and inventory of a firm, as far as maintenance is concerned.
Capital Investment Decisions
The corporate finance department is required to make capable and favorable capital investment decisions as well as deploy capital for long-term sustainability. The division is mostly concerned with capital budgeting, but this doesn't mean that it completely ignores other activities related to this task. Capital budgeting is very helpful to a business as it allows the firm to know their expenditures, provide cash flow estimates for future capital projects, compare investments, and provide insights on what should go into its capital budget. Capital investment decisions are not child's play as it is the core foundation of any successful establishment. The ability to make great budgets will increase performance, and if done wrongly, a poor budget might cause stagnancy for a firm.
The corporate finance division is also expected to look for sources of finance or funds in forms of debts and/or equity. Here, a company can choose to collect loans from banks and other financial creditors, or they may choose to issue debt instruments in forms of corporate bonds to interest buyers. In some cases, corporate firms can choose to sell stocks to equity investors, and this is predominant when they're trying to source out funds for expansions. For a company to better evaluate its performance, it needs to have property information about how its debts matches its equities and assets. If a firm has too much debt, it increases the risk of breaching the loan contract or raises the chance of inability to fulfill the loan at the deadline. Also, if the firm depends heavily on securities and assets, theres a chance that new investors wont be attracted to such firms as returns will be very low. Either way, corporate financing is a means of sponsoring capital investments, and knowing how to get these funds is a job expected of the corporate finance division.
Liquidation in Short-Term
Corporate finance is also expected to handle short term liquidity so that the firm can continue its operations without hindrance. In short term financial management, emphasis is placed on the current assets of a firm, its working capital and operating cash flow. It is also expected of a firm to be capable of shouldering all their liability obligations as at when due. This obligation consists of possessing enough current properties that can be easily liquidated to prevent pauses in the continued operation of the firm. Also, issuing commercial papers as liquidity backings or getting additional credit lines are activities involved in short-term financial managements.