Define Corporate Finance
The theory of a firm states that companies are in business to make money. Corporate finance is the part of a company that deals with managing money and other assets; only through sound and consistent financial strategy can a company reach its profitability goals while still complying with applicable laws and ethical standards. Understanding corporate finance will give you clues to business strategies and make you a better manager or investor.
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Basics
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At its core, corporate finance is how a company raises, uses and invests money. Let us say you want to start a company, perhaps in the business of providing Internet content. You would need an office building and workers, plus computers with Internet connections. Yet to obtain these physical things needed to run the business, you also need financing. Corporate finance encompasses the initial investment in rent, equipment and labor, as well as decisions about what you will do with the revenues you make. Corporate finance would also guide you in raising additional money or merging with another firm to expand the business.
Function
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The company balance sheet explains in more detail the function of corporate finance. The Balance Sheet Model, at its most basic, demonstrates finance through assets and liabilities. Assets can be current or fixed. Fixed assets include buildings and machines, plus intellectual property such as company logos or slogans, all of which last relatively long, or many business cycles. Fixed assets are also either tangible (like machines, which you can touch) or intangible (such as a brand name). Current assets include inventory and cash on hand, plus any other assets that are expected to be used up within one year.
On the opposite side of the balance sheet from assets are liabilities. Liabilities are classified as debt or equity, and represent the methods by which a firm can raise money for operations. Debt is borrowing of funds; the lenders of corporate debt receive interest payments for a fixed amount of time but have relatively little or no say in the management decisions of the firm. Equity is in perpetuity, meaning that holders of company equity such as stock have ongoing income and some say in the firm's strategic direction. Stockholders in your company may receive dividends, or residual income, and receive votes on various company matters, for instance.
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Structure
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If the balance sheet represents the basic function of corporate finance, who oversees the balance sheet? Financial officers conduct the fiscal duties of the firm, making day-to-day financial decisions and working with management to arrive at business strategies and to comply with laws. A typical corporate finance department structure has a chief financial officer, or CFO, at the top of the division. The CFO oversees a treasurer, who deals with cash expenditures, and a controller, who handles accounting duties, including taxes. The CFO will normally report directly to top executives, such as the chief operating officer and/or the chief executive officer, and to a board of directors.
Strategies
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The balance sheet and the reporting structure show the what and the who, respectively, of corporate finance. Strategy, however, is how companies manage money and other assets. For instance, a corporate finance strategy may involve reducing inventory levels during a weak economy, or taking on added debt when interest rates are very low. Finance strategy points out opportunities for advancing the interests of the firm, such as merger and acquisition activities. The strategic element of finance means that finance is more than just simple bookkeeping. At its most basic, corporate finance aids the company in generating more money out of its investments than the company spends making those investments.
Consideration
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It is impossible to look at corporate finance and not consider ethical questions. In the aftermath of the collapse of Enron and the Arthur Andersen accounting scandal of the early 2000s, corporate finance came under increased scrutiny; firms began to more closely examine their financing strategies as well as the day-to-day activities of financial officers. Accounting scandals and corporate malfeasance have detrimental effects on the public's trust in companies, reducing investment and harming the national economy. Therefore, ethics in corporate finance will continue to be a focus for both firms and investors, not to mention government regulators and lawmakers.
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