What is Corporate Finance
Corporate Finance Definition – the financial affairs of companies and institutions.
Corporate Finance is the area of finance related to the financial money needs of a company to enable the functions of the business to work smoothly.
It varies from accounting, which is more the procedure for traditional recording of the activities of a business, from a financial money perspective or money management perspective.
Capital is cash put into an organisation to bring it into life and to grow and maintain it. This varies from funds which are put in to underpin and maintain the business, including the purchase of raw materials; the financing of stock; the financing of credit that is required between production and the profits from sales. In other words what we call working capital.
Corporate Finance can start with the smallest of investments such as from close relatives and acquaintences who put cash into an organisation, to invest into its start up and life into the commercial world.
At the other end of the spectrum, it is the multi-layers of corporate debts, financing and money flows within the vast international corporations and the cash flows within the Public sector.
Corporate Finance essentially deals with two types of capital: Equity holding and debts. With Public sector they receive funds from the taxpayer.
Equity is the shareholders financial commitment which carries the rights of ownership, voting and control . Equity tends to be within the organisations long-term financing, in the hope of creating additional wealth with their investment. This can come either through benefits, or dividends, and can be linked to the number of shareholdings held. Of course within the Public Sector this does not apply.
Dividends usually are applied within very large, long-established Corporations, which are already carrying sufficient financial stability and strength to cover their funding plans. Smaller companies usually pay the directors who are the owners through dividends more than salary. This can be more tax efficient.
Younger, increasing and less-profitable organisations are generally insatiable consumers of all the financial money they can access and thus do not usually make surpluses from which dividends may be paid.
In the case of young and growing businesses, value is often continually sought to improve share price or company value. Corporate Finance is important, the primary sources of financial investments are often from private people. After family and friends, high net worth people and experienced sector figures often invest in appealing up and coming corporates. These are the pre-start up and seed stages necessary for growth and starting.
At the next level, when the company has started to form and grow into a natural business, the primary investors may generally be financial investment funds, which are dedicated to taking young Corporate Financials through quick growth to hopefully highly successful companies to its exit, or a public offering of its shares to the stock market.
The other primary category of corporate finance relevant to financial investing comes via debts. Many Corporate companies seek to avoid watering down their ownership of the companies through further share offerings and decide that they can make better returns from loans to their Corporates, these loans incur charges to service them, but in the long run it is said that debt is cheaper than equity. This procedure of business operations via financial debts are generally referred to as make use of gearing and leveraging.
Whilst raising the value of the organization, they must be careful that it does not become too leveraged and thus not capable of making its debts repayments. Decisions in corporate finance determine the level of leveraging and financial management of the organisation.
Corporate Finance is eventually a balancing act. It must successfully balance ownership and expansion ambitions, potential opportunities, danger of losing profits, with a proper consideration and accommodation of both the interests of internal and external investors.