Corporate finance is the financing that is related to the activities and transactions carried out by the company related to financing sources, capital structure, and investment decisions. Corporate finance is primarily concerned with maximizing shareholder value through long- and short-term financial planning and the implementation of various strategies to reach that goal.
Corporate finance activities range from VC decisions to investment banking. Corporate finance also includes four basic aspects: financing planning, fundraising, investment, and monitoring.
Scope of corporate finance
- Investment decisions, including analyzing different investments to reach the best available alternatives.
- Financing decisions that include raising capital.
- Dividend decisions that include analyzing the amount of returns for shareholders.
- Managing working capital to increase the efficiency of daily business management.
- Corporate financial services that include advising during mergers and acquisitions.
- Developing financial strategies related to the implementation of policies.
Corporate finance methods
- Financing through shares: Financing through shares is limited to increasing the capital of the owners of the company.
- Debt financing: This method is called “external financing,” such as bonds, corporate loans, and private financing.
Corporate finance objectives
- Increasing capital investments: These investments are made through the capital budget, where the company determines capital expenditures, estimates future cash flows from proposed capital projects, studies potential returns from them, and decides which projects should be included in its capital budget.
- Capital financing: To finance companies, the company provides capital in the form of debt or equity. The company may borrow from commercial banks and financial intermediaries, or it may issue debt securities in the capital markets through investment banks. A company may also need to sell shares when it needs large sums of money to expand the business.
- Securing short-term liquidity: Short-term financial management is one of the objectives of corporate finance and includes current assets, or working capital, and operating cash flows in order to ensure that there is sufficient liquidity to carry out ongoing operations. Short-term financial management may also include obtaining additional lines of credit or issuing commercial paper.
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