Corporate finance - What's this about?
- March 15, 2023
- 10 min read
Corporate finance is the pulse of modern business.
It is the practice of allocating financial resources, making investment decisions and managing financial risks to maximise the value of a company for its shareholders.
It is the art of balancing financial opportunities and challenges and transforming ideas into profitable ventures.
That’s a lot to get your head around, isn’t it?
Let’s try to lighten it up a little:
Imagine a CEO walking into a board meeting with a bag of money on their shoulder, announcing: “Ladies and Gentlemen, I have solved all our financial problems! I won the lottery!”
As the room erupts in applause, the CFO chimes in, “Sorry to burst your bubble, but that money is for next week’s payroll. We still need to figure out how to finance our long-term growth.”
While humour may not be the first thing that comes to mind when thinking about corporate finance, this scenario does highlight the importance of careful financial planning, strategic thinking, and good communication in the field.
Overview:
What is Corporate Finance?
Corporate finance is a branch of finance that deals with financial decision-making for corporations, including the sources of funding and capital structure of a company, capital investments decision, and how to manage and allocate financial resources.
The goal of corporate finance is to maximise shareholder value.
Picture this:
As a CEO you must determine how to raise funds to expand a business, whether to acquire another company, or how to pay out dividends to shareholders.
Your CFO must ensure that the company has adequate cash flow and sound capital structure to meet its short-term obligations, while keeping an eye on the company’s long-term financial goals.
Corporate finance is the backbone of these decisions.
On the surface, it may sound like it is just about numbers and spreadsheets, but it goes deeper. It is about understanding the financial landscape and creating net present value for stakeholders.
Understanding Corporate Finance
Corporate finance can simply be understood as the financial management of a corporation.
This involves making decisions about how to allocate the company’s resources for maximizing shareholder value, and how to balance risks and rewards of different financial decisions.
Corporate financing will help you to answer some big questions –
- Should your business invest in any proposed capital projects? What will be the cost of capital?
- Should it acquire X company?
- Should it issue debt or equity securities? Is there too much debt?
- How do you manage your company’s cash and liquidity? What is your capital budget?
What types of activities manage Corporate Finance?
It encompasses a variety of financial activities, such as –
Capital Budgeting:
The process of evaluating and selecting long-term investment opportunities for a company.
Capital Structure:
The composition of a company’s financing mix, including debt, equity, and other securities.
Dividend Policy:
The decision on how much profit to retain and how much to distribute to shareholders as dividends.
Working Capital Management:
The management of a company’s short-term assets and liabilities to ensure its ongoing operational viability.
Risk Management:
The identification and assessment of financial risks faced by a company, and the implementation of strategies to mitigate those risks.
Mergers and Acquisitions:
The process of combining two or more companies into a single entity, or acquiring another company outright.
Financing Decisions:
Decisions relating to the type and mix of securities used to raise funds, such as debt or equity financing.
Treasury Management:
The management of a company’s cash and liquidity, including the use of financial instruments to manage currency and interest rate exposure.
Investments and Capital Budgeting
Planned investments and capital budgeting play a crucial role in corporate finance.
It helps you and the management team make informed decisions about which investments to engage in and how to allocate the company’s financial resources to expand its value for shareholders.
The process is used as a way of evaluating and selecting long-term capital investment opportunities for your company to determine whether proposed investments are aligned with your company’s strategic goals and if they will generate a sufficient return on investment.
So how do you do this?
By analysing capital investment proposals using discounted cash flow analysis and sensitivity analysis, to determine the expected future cash flows, risk, and profitability of the investment.
Capital Financing
Another important aspect of corporate finance is capital financing.
It involves the decisions about how your company will raise the funds it needs to finance its operations and investments.
Your choice of financing will impact your company’s capital structure, which is the mix of debt and equity that it uses to finance its activities.
For example, if your company needs to raise capital, it can do so through issuing bonds, which are a form of debt. Alternatively, it can sell stock, which is a form of equity. Capital financing will determine which is the best option for your business.
Short-Term Liquidity
Short-term liquidity refers to a company’s ability to meet its current obligations, such as paying its bills, debts, and employees, with its available cash and other short-term assets.
Its role in corporate finance is essential for a company’s ongoing viability and stability.
Say, for example, your company is struggling with its short-term liquidity.
This means it may not be able to meet its obligations. This in turn, may damage its reputation, harm its relationships with suppliers and creditors, and increase the risk of bankruptcy.
To improve your company’s short-term liquidity, your short-term financial management may look at accounts receivable, accounts payable, cash and short-term debt, to make sure it has the resources it needs to meet its obligations as they come due.
If you are looking to maximise your company’s shareholder value through effective capital investments, short-term financial management and decision making you need to set up comprehensive corporate finance practices.
For effective and strategic corporate finance services across all stages of business and business development, the Sleek team will help you get started. Call now +61 2 9100 0480 or contact us here.