Corporate finance deals with all financial activities that are required to operate a corporate entity or business. Corporate finance is all about managing money in a business, right from getting funds to managing the usage of the funds. In a small business, the entrepreneur may generally handle the finance function himself. But in large corporates, there would be a finance department headed by a Chief Finance Officer (CFO) with a team of finance professionals, who would manage the finances of the company.
A key goal of corporate finance is to enhance the shareholder value. The CFO’s job is to ensure that funds needed to run the business are available. Corporate finance also deals with mergers, acquisitions and related activities that affect the finances of a company. Project management, taxation, cash flow management are some of the other functions of corporate finance in a business.
The key activities of corporate finance include planning for finance, organizing finance, investing funds acquired and managing the finances.
Planning for finance
Planning is a vital function of corporate finance. Key aspects include how much finance is required, how much money should be raised from external sources, which sources are available to raise funds and how the money can be utilized in a profitable way. If the finances are well planned, then running the business would be easy.
Once the amount of finance needed is decided, the next activity is to raise funds. The various sources of finance for a business include:
- Loans from financial institutions
- Funds from venture capitalists
- Bank overdrafts and loans from banks
- Accepting deposits from the public
- Issue of debentures and equity shares
- Trade credit from vendors
- Mortgages on property
- Leasing or hire purchase
- Grants from the government or other institutions
Once the funds are available, they need to be invested for the company’s usage. This is known as capital budgeting.
There are two elements here – fixed capital and working capital. Fixed capital refers to purchasing fixed assets like land, building, and machinery. Working capital refers to funds used for day to day operations and is used for the purchase of rawmaterials, payment of rent and salary, etc.
Managing the finances
Regular monitoring of the usage of finances is an essential part of managing finances in a corporate business. As we mentioned earlier, enhancing shareholder value is a key goal of corporate finance. Hence, ensure optimum use of finances, preventing waste and misuse and getting maximum return on investments is something the corporate finance team would need to focus on. This also involves managing risks. There are various tools, including software that can be used to manage finances effectively.
Why is corporate finance so important?
The reasons why corporate finance is so important are:
- It helps in decision making. Any decision taken needs to take in mind the availability of funds. So corporate finance aids decision making of an organization.
- The goals of an organization, be it short-term or long-term need finance. Whether it is profitability, increasing customer base; finance is required to achieve goals
- It helps to minimize the cost of
- It helps to raise the capital needed to run the business.
- Financing is needed for organizations to carry out research and development.
- Finance is needed for expansion of a business and for diversification.