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Corporate Finance: Introductory
Every decision made in a particular business has financial implications, and any decision that involves the utilization of money is a corporate financial decision. Defined considerably, everything that a business fits under the rubric of corporate finance.
It is, in fact, unfortunate that we even consider the topic of finance because it suggests to many people a focus on how large corporations proceed to make financial decisions and seems to exclude small and private businesses from their purview.
A more appropriate title for such a professional term would be Business Finance because the fundamental principles remain the same, whether someone is looking at large, publicly traded firms or small, privately run businesses. All businesses have to invest their resources wisely, find the right kind and mix of financing to fund these investments & return cash to the owners if there are not ideal enough investments.
A corporate financial entity deals with a corporation’s capital structure, including its funding function and the required actions taken by management to increase the company’s commercial value. Moreover, corporate finance includes the tools & analysis utilized to prioritize and distribute financial resources.
The overall purpose of corporate finance is to maximize the value of a business through the planning and implementation of resources while balancing risk and profitability.
Importance of Corporate Finance
Corporate finance is vital for all sizes of businesses, from small startups to large corporations. Here’s why it matters.
- Smart money moves: With corporate finance, you choose wisely where to spend money. It’s like your business GPS, guiding you in the capital markets to invest in things that will bring you more profits.
- Access to funds: Whether you’re a small bakery or a big tech company, you need money to run. Corporate finance helps you determine how to get that money – from loans, investors, or your profits.
- Growth on your terms: Imagine you have a cool idea for a new product. Corporate finance helps you decide if it’s worth investing in. It stops you from spending too much on something that might not work.
- Tackling Risks: Just like you wear a seatbelt in a car, corporate finance helps you manage risks. It’s like a financial airbag cushions your business if things go wrong.
- Maintaining cash flows: Businesses need money to keep going. Corporate finance ensures you have enough cash, to pay dividends, when bills come in, employees need to pay, and unexpected costs pop up.
- Number talk: You don’t need to be a math genius, but you need only to understand them enough. Corporate finance takes those confusing numbers on your financial statements and tells you what they mean for your organization. Here, a financial analyst and his team use financial modeling techniques to arrive at meaningful insights.
- An eye on your future: Whether in a small shop or a big factory, the goal is to stick around for a long time. Corporate finance helps you plan for the future by setting goals and ensuring you have the cash to achieve them.
CORPORATE FINANCE EXAMPLES
- Establishing an initial public offering (IPO). An IPO is undertaken when a privately funded company decides to be listed on a stock exchange so that it can access funding from capital markets.
- Developing and executing a compensation program for associated shareholders.
- Securing the required loan from a bank. The terms of such loans are often either based on the company’s credit rating or are asset-backed. If they (the companies) have assets as their back, the bank can claim the company’s property in case of default recovery.
Significance of A Company’s Financial Skeleton Structuring Corporate Benchmark
A company’s capital structure is often considered crucial to maximizing the value of the business. Its structure can be an association of long-term and short-term debt and (/or) common & preferred equity. The ratio between a firm’s liability & its equity is often the basis for determining how well-balanced (or risky the company’s capital financing is or might be).
A company funded by debt is considered to have a more aggressive capital structure and thus potentially holds more risk for stakeholders. However, taking such risks is often the primary reason for a company’s growth and success.
Corporate Finance is of strategic importance to a company, and its activities are often very visible to the owners and Board of Directors. Proper Corporate Finance can only be executed well if done close to where important decisions are being made. It involves the long- and short-term funding of a company and the investment of its assets, but it is ultimately concerned with corporate strategy, which is developed at the highest levels of the organization.
