What is Corporate Finance?
- Business involves decisions which have financial consequences and any decision that involves the use of money is said to be a corporate finance decision.
- Corporate finance is one of the most important part of the finance domain as whether the organization is big or small they raise and deploy capital in order to survive and grow.
- There are various roles that corporate finance plays, which are very interesting and challenging, one of the main roles is that of being a Finance adviser.
- This can comprise helping to manage investments or even suggesting a mergers and acquisitions strategy.
Corporate Finance Principles
- Investment Principle:
This principle revolves around the simple concept that businesses have resources which need to be allocated in the most efficient way.
- Financing Principle:
The job here for the corporate financier is to make sure that the business has right amount of capital and the right mix of debt, equity and other financial instruments.
- Dividend Principle:
So the basic discussion here is that if the excess cash should be left in the business or given away to the investors/owners.
Understanding the concepts
Capital budgeting is the process of planning expenditures on assets (fixed assets) whose cash flows are expected to extend beyond one year. Managers study projects and decide which ones to include in the capital budget.
-The “capital” refers to long-term assets.
-The “budget” is a plan which details projected cash inflows and outflows during future period
The value of money
If you have a dollar today, you can earn interest on it and have more that a dollar next year. For example, $100 of today’s money invested for one year and earning 8% interest will be worth $108 after one year.
Cost of capital
- Capital is an essential factor of production, and has a cost. The suppliers of capital require a return on their money.
- The cost of capital is significant for a firm to calculate, as this is the rate of return that must be used when evaluating capital projects.
- The return from the project must be superior than the cost of the project in order for it to be acceptable.
Working capital management
- Working capital management involves the relationship between a firm’s short-term assets and its short-term liabilities.
- The goal of working capital management is to ensure that a firm is able to continue its operations and that it has adequate ability to satisfy both maturing short-term debt and upcoming operational expenses.
- The management of working capital encompasses managing inventories, accounts receivable and payable and cash.
Corporate Finance Career Overview
- Corporate finance professionals are accountable to manage the money of the organization i.e. to know from where to source it, deciding how to spend it to get the maximum returns at the lowest possible risk.
- They seek to find ways to ensure flow of capital, increasing the profitability and decreasing the expenses.
- They have to monitor the other departments on their expenditure and if the company is in a position to take the risk of additional expenditure.
- They explore the best ways to help company expand whether it is through acquisition or investing internally.