Everything You Should Know about Corporate Finance

The ultimate goal of every business is to generate profits. But this is easier said than done. Irrespective of their size or industry, every corporate entity needs to streamline its finances to generate more revenue, optimize wealth distribution, and maximize shareholder value.Corporate finance, a subfield of finance, is relied upon by businesses for addressing matters related to their capital structure, funding sources, investment decisions, and accounting. While corporate finance is an extensive field and every organization has finance experts for managing this critical aspect of their business, new-age entrepreneurs should at least understand its basics.Here are some of the most important things you should know about corporate finance-

In simple words, corporate finance is all about the financial decisions an organization makes throughout its day-to-day operations. The primary aim of these decisions is to utilize existing capital to generate higher returns while also minimizing the risks related to certain corporate decisions.For instance, all the decisions regarding sources through which an entity raises capital to fund its operations fall under the extensive umbrella of corporate financial decisions. The common funding options include angel investors, partners, venture capitalist (VC), and corporate loans. Analyzing the pros and cons of each of these sources and finalizing one is also a corporate financial decision.

Now that you have a brief understanding of what corporate finance is let us have a quick look at what it generally covers-

• Decisions regarding how to raise capital from different sources to restructure finance
• Analyzing various investment options to generate maximum returns
• Managing working capital to streamline everyday operations
• Decisions regarding partnerships, mergers and acquisitions (M&A), demergers, takeovers, and company listing (IPO)
• Raising and restructuring corporate debt
• Dividend announcements
• Developing financial strategies to implement corporate and government policies

Organizations have a full-fledged finance team to oversee all the corporate finance tasks. The Chief Financial Officer (CFO) is the head of the finance department and is responsible for supervising all the finance-related decisions taken by the organization. The team generally also has a Financial Controller (FC) for overseeing all the accounting functions.The Treasury Manager performs the critical role of handling the capital and analyzing various investment options, building relationships with stakeholders, and managing credit and banking relationships. Then there is an Account Manager or Chief Accountant responsible for all the activities related to accounting and reporting.Larger organizations often have supervisors and line managers for specific roles of the finance department to ensure that everything is streamlined and runs smoothly.

While it is up to the organization to manage its finances and make decisions to optimize profitability, reduce debt, and reward investors, a few tasks are commonly performed in most companies. Here are some examples of such common tasks-

1. Capital Financing

Capital financing involves all the decisions made by the company for financing their capital investments. This could either be done through equity, debt, or a mix of both. Businesses also consider long-term funding in the case of significant capital investments or expenditures through stock selling or issuing debt securities.Any successful business needs to balance equity and debt funding sources as excessive equity dependence might dilute earnings, while excessive debt can raise the risk of default. Corporate finance professionals are tasked with optimizing the capital structure of a company.

2. Capital Investment

Capital investments and effectively utilizing the company's long-term capital are two of the most critical corporate finance tasks. Businesses utilize capital budgeting strategies to identify capital expenditures, estimate future cash flows, compare planned investments, and choose projects that should be included in the capital budget.Decisions regarding capital investments can have severe consequences on the business. For instance, under-funded investments or excessive investing can compromise the financial position of any company, either due to insufficient operating capacity or higher financing costs.

3. Short-Term Liquidity

Corporate finance is also responsible for managing the company's short-term finances and ensuring adequate liquidity for managing day-to-day operations. This aspect of corporate finance generally revolves around current liabilities and current assets or operating cash flows and working capital.Any organization should be able to meet the current liabilities when they are due. To ensure this, there should be sufficient liquid assets so that the current operations are not disrupted in any way. Short-term financial management can also involve applying for capital lines or working capital.

4. Dividends and Return on Capital

Corporate managers should also decide whether the company's excess earnings should be retained for future operational requirements and investments or be distributed as dividends to the shareholders or used for share buybacks. Retained earnings are often used for business expansion as it minimizes the need for additional debt and prevents equity devaluation from the share sale.If corporate finance managers have reasons to believe that the company can generate returns higher than the cost of capital on their capital investment, they can consider retaining the excess earnings. In most other cases, it is distributed to the shareholders through share buybacks or dividends.

Managing corporate finances is probably the most critical task for any successful business. Apart from hiring finance experts, businesses can also benefit from building a long-term relationship with a reputed corporate loan provider.Top lenders in the country offer a wide range of business loans, including project finance, structured finance, term loans, working capital, and more, to assist businesses at every stage.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.