You should think twice if you consider corporate finance apart from the actual company’s operations. Nevertheless, almost every business decision has financial consequences, and any decision requiring the use of money is a corporate finance decision. Therefore, in this blog, you will know what is corporate finance and what are its primary activities.
What is Corporate Finance?
It is related to the financial activities that are essential for running a company. In addition to that, it mainly focuses on increasing shareholder value through short and long-term planning and applying different strategies. Corporate finance is how to best increase money and utilise it. Therefore, it deals with capital structuring, investment decisions, and financing.
Shortly, it focuses on how to increase the company’s value through investment decisions and financing.
Importance of a Corporate Finance
Large corporations require insights into the data that can help them in making the following decisions.
- Proposals of investment options
- Shareholder’s dividends issue
- Assets, liabilities, and capital investments management
In order to increase the value of a company, its capital structure is essential. The capital structure of a company can be a combination of common & preferred equity or short-term and long-term liability.
Moreover, the phases such as planning finances, investments, and financial monitoring & risk management are equally important in terms of corporate finance.
The Main Activities in Corporate Finance
The following are the main activities included in it.
1) Capital Financing
It is one of the primary activities in corporate finance. It includes decisions on how to best fund the capital investments through the liability, equity, or a combination of both of a company. Long-term financing for primary investments or capital expenses can be gained by issuing liability securities or selling stocks of the company in the market via investment banks.
The management of the liability and equity is one of the activities in it. Having a large number of liabilities can maximise the risk of default in repayment, whereas depending too much on equity can reduce income and amount for original investors.
Shortly, capital finance is one of the operations in corporate finance that aims to maximise the capital structure of a company by lowering its WACC.
Key takeaway: WACC stands for Weighted Average Cost of Capital.
2) Capital Budgeting & Investment
It is also one of the main activities of capital finance. It involves planning where to put the long-term capital assets of a company to earn the best risk-adjusted returns. This primarily requires detailed financial analysis to determine if to pursue an investment opportunity or not.
It utilises financial accounting tools in order to
- Decide which project to include in the capital budget
- Identify capital expenses
- Compare planned investments with projected revenue
- Evaluate the cash flows from the proposed capital projects
Financial modeling also falls under capital budgeting & investment that is used to compare alternative projects and to evaluate the investment opportunity’s economic impact.
3) Dividends & Return of Capital
The company requires the corporate finance experts to decide to retain a company’s excess income for operational needs and future investments or to give out the income to shareholders in share buybacks or dividends form.
In case the experts of company finance within the company believe they can achieve a higher rate of return on capital investment than the coat of capital of a company, they should pursue it; otherwise, the capital should be returned to shareholders through share dividends or buybacks.
We hope now you have understood what is corporate finance. We will conclude our blog by saying that limited company finance is related to crucial financial activities for running a company. It helps large companies make the decisions mentioned above. So we can say that it is essential for the companies. Therefore, it is highly recommendable to consult an expert if you need support and assistance with any aspects of corporate finance.
Talk to our accountants in Corydon about how we can help with any aspect of corporate finance or business growth issues! We are just a click away! If you want our service of managing finances, then feel free to contact us!
Disclaimer: This article intends to provide general information on what is corporate finance.