Blog15 - The concept of corporate finance

The concept of corporate finance

CORPORATE FINANCE is primarily concerned with maximizing shareholders’ value through short-term and long-term financial planning and implementation of various strategies.

It consists of financial activities related to running a business.Short-term activities of corporate finance include:managing current assets and current liabilities,investments and inventory control.Long-term investments include new capital purchases and investments.

Capital Investments. Corporate finance department is responsible for distribution of long-term capital of a company.The process of making capital investment majors on Capital Budgeting, a crucial procedure of corporate finance. Capital Budgeting helps a company to identify capital expenditures, compare the planned investments with potential investors, estimate the future cash flows from proposed projects and deciding on projects to include in capital budgeting. Capital investments is perhaps the most crucial responsibility of corporate finance because of its serious business implications.Poor budgeting can cause under-investing or over-investing by a company.This has the implication of putting the company in a very weak financial situation because of increased financial cost or inadequate operating capacity.

Capital financing. In addition to taking care of the investment capital,corporate finance is responsible for sourcing capital.This is in form of equity or debt.Companies borrow from banks and other financial intermediaries. Moreover, they can issue debt securities in capital markets(through Investment Banks).They also sell stock to equity investors,especially when raising long-term capital.Capital financing is therefore a balancing act between debt and equity.It MUST provide the capital required to implement capital investments.
Short-term liquidity. Corporate finance ensures that there’s enough finance to finance the ongoing operations.Short-term liquidity involves current assets and current liabilities or operating cash flows and working capital. A company is required to meet its financial obligations when due.Short-term liquidity can also involve additional credit lines and issuance of commercial papers to act as back-ups.

Corporate finance is therefore CRUCIAL in determining the perfomance of any business financially.It is therefore important for businessowners to have comletent finance managers to ensure their bussinesses continue to grow financially.

Post Author: Adrian