Finance is the backbone of every organization. At some point in time, every business has had to deal with tough decisions related to finance. Whether it is utilizing available funds or borrowing capital, the list goes on and on. Simply put, corporate finance deals with all these above mentioned issues, alongside a few others, to strengthen the financial structure of any company.
In this article, we will discuss everything there is to know about corporate finance, including the types of corporate finance and the scope of corporate finance.
So, without further ado, let’s get started!
Understanding Corporate Finance
Corporate Financing is an umbrella term that encompasses all the different methods followed by a business to raise capital, which can later be used to support its day-to-day operations, as well as to invest in opportunities that can lead to its future expansion. The said operations include generating capital through joint ventures, borrowing money with the help of loans, and even issuing stocks and bonds, among other things.
Irrespective of the type or size of a business, the ultimate goal of every company is to streamline all its corporate financing operations for optimal wealth distribution.
All these factors make corporate finance an invaluable part of the financial management strategy of a business.
Types Of Corporate Finance
Before we delve deeper into the scope of business finance, let’s look at the different types of corporate finance.
Angel investing is one of the most common methods primarily used by small to mid-sized companies to raise capital. Simply put, angel investors are typically high-net-worth individuals who invest their money in return for a share of the profit made by the particular business. This can either be done individually or as a group in different firms. They are commonly referred to as seed investors, and their main purpose is to get better returns on their invested money.
Also known as ownership finance, equity finance is another popular method of Corporate Financing wherein investors put their money into any business they prefer in return for a percentage of company ownership. The company or business is not obliged to return the amount of money they have raised from this investment and instead has to share a specified amount of predetermined profit.
IPO (Initial Public Offering)
Similar to equity investing, in IPO, companies raise funds from the public and, in return, allow equity or preference shares. It occurs when a company decides to offer its share to the public for the first time.
Venture capital is very closely related to angel investors. Wondering how? Well, after a company has raised funds through angel investors and is open for more rounds of funding, that is where venture capitalists come in. It is described as one of the most successful ways of generating more funds, especially for start-up companies.
As the name suggests, debt funding occurs when a company raises capital from an external source and has to repay the amount with the specified interest rate. Debt financing can be of different types, such as bank loans, merchant loans, and debentures. Merchant loans are when businesses take commercial loans from lenders other than banks or non-banking financial institutions.
Last but not least is equity crowdfunding, which is when a company raises capital from a high-net-worth individual or other investment platforms. In return, the investors receive a percentage of company ownership directly proportional to the amount of money invested.
Principles Of Corporate Finance
There are typically three principles of corporate finance, namely,
- Investment Principle
- Financing Principle
- Dividend Principle
The investment principle states that investors should put their money only in those projects that have higher chances of giving back more return than the minimum acceptable return.
According to the financing principle, enterprises must finance their investment with the cheapest source of funds. It should use a combination of equity and debt financing in order to minimize capital costs.
Last but not least, the dividend principle states that dividends should be paid to shareholders to maximize their value only in cases where the firm has excess cash.
Corporate Finance Scope
Business finance scope typically extends across extensive domains within a company, assisting each to manage financial resources and reap value for the parent organization. Let’s explore how the scope of CF expands and brings profitability to any enterprise.
Financial planning refers to all the measures a business must take to meet its financial objectives. As a financial planner, you must calculate all the financial requirements before venturing into a new business or expanding a current one. You will be entrusted with responsibilities such as creating current financial plans and forecasting future ones, alongside considering other essential factors such as repayment cost, liquidity, and cost.
Corporate finance officers are responsible for identifying and assessing potential investment opportunities that can help an organization expand and create value. Additionally, they are also required to make accurate predictions about better investment opportunities and select a suitable type of investment vehicle that meets all the needs and demands of investors or analyze bonds for valuation and investor specificity.
Risk Management is one of the most crucial elements of corporate finance. It refers to identifying and subsequently eliminating all the potential risks that might haunt an organization’s financial system. This includes the risk of loan default or the risk of changes in a company’s asset value. The idea is to develop contingency plans that can be deployed in the future if risks occur.
Analysis And Decision-Making
Financial analysis and modeling are some of the many tools corporate finance professionals use to make well-informed financial decisions. Some of the many examples of the same might include using financial theories and ideas, predicting future financial performance, or analyzing financial statements.
The Future Of Corporate Finance
With the rise of FinTech, there has been a steady shift toward more innovative means of financial decision-making. The future of corporate finance is likely to be determined by three main factors: data-driven decision-making, the growing importance of automation, and the birth of alternative financing options.
Following the rapid advancement of innovation assimilating in corporate finance, the sector is most likely to open doors for skilled professionals in the coming years, reflecting a bright future for corporate finance and its professionals.
Corporate finance is invaluable to any organization since it provides the necessary tools and techniques to generate sound financial decisions. Therefore, understanding the different principles of corporate finance will undoubtedly help in an organization’s future growth and profitability. Needless to say, it is a very complex and ever-changing field, and individuals must stay up-to-date with the latest economic theories and practices to stay relevant.
This is where an MBA in Finance degree comes into play.
It not only provides the candidates with all the necessary information and knowledge related to finance and its different aspects but also prepares them with the required skills to survive in the corporate world.
On that note, Golden Gate University, in collaboration with upGrad, brings you the Master Of Business Administration program. This 15 months duration course is specifically designed for working professionals who wish to advance in their careers to meet all their professional goals ahead of their 9-5 role.
From excellent placement opportunities to 24*7 student support, the list of benefits that comes with this program is endless. Furthermore, the course offers five main concentrations, from which students can choose any one or a combination of topics. These are Finance, Business Analytics, Adaptive Leadership, Marketing, and General.
So what are you waiting for? Enrol now, and embark on your journey to success!
Q1: What are some of the basic functions of corporate finance?
There are mainly five basic functions of corporate finance.
- Capital Budgeting
- Financial Management
- Corporate Governance and
- Risk Management
Q2: What skills are required for corporate finance?
A corporate finance professional is expected to possess the following skills,
- Analytical and Quantitative Skills- It is required of every candidate to have strong mathematical skills, alongside the ability to put together various kinds of reports.
- Problem-solving Abilities- Candidates are also expected to have good problem-solving abilities, especially if they apply for a senior position.
- Interpersonal Skills- Since this job requires candidates to deal with other departments, investors, bankers, and customers, candidates need to be able to communicate efficiently.
Q3: What is the source of Corporate Financing?
There are mainly three major corporate financing sources: debt capital, equity capital, and retained earnings. Retained earning is described as the remaining net income after an enterprise pays off any expenses and obligations. The funding that a company raises through lenders or corporate bond offerings is known as debt equity. Lastly, equity capital refers to the amount of cash a public company earns after it has issued new shares to shareholders in the market.