Corporate finance is a field that provides companies with different options to plan, develop and manage the capital structuring of their business. Finance professionals can learn about corporate finance and assist companies in decision-making and risk management. Understanding the basics of this topic can help you learn ways to improve the value or balance the profit and risk of a company. In this article, we define corporate financing, explain its importance and major activities and list common job roles in the field of corporate finance.
What is corporate financing?
Corporate financing is the process that helps companies allocate their funds or resources and focus on increasing the stock value. A business may generate its funds from both internal and external sources. Equity and liability are the two major sources that may act as resources in corporate finance.
Professionals working in this field help companies generate funds at the lowest possible cost. Corporate finance also involves raising capital to grow and purchase businesses. Many businesses hire professionals in corporate finance departments to monitor their financial activities and make effective capital investment decisions.
For example, a corporate financial manager can develop plans to invest the funds in the right place and help in growing the wealth of shareholders. The two main objectives of corporate finance are capital budgeting and working capital management.
Capital budgeting includes analysing and selecting the projects to invest in and working capital management is managing the company’s monetary funds from existing assets to liabilities. Finance professionals can use the concept of corporate finance to help businesses in improving their capital structure to increase overall profit and market value.
Importance of corporate financing
Corporate finance allows companies to manage their capital structure and improve their business value. Finance professionals analyse the ratio between equity and liability to assess the capital financing of a company. This can help them identify risks and issues in the company’s capital structure.
With the help of corporate finance tasks, companies can make effective business decisions. Finance professionals review the availability of funds and raise capital for specific projects. They ensure continuous financial support for the growth and expansion of companies. Other benefits of corporate finance are clearance of loans on time, procurement of raw materials according to requirements and purchase of necessary equipment and machines for the smooth running of the business.
Effective financial management can help companies control their business activities such as production and sales. In addition, many companies rely on corporate finance for the replacement of old assets and risk management.
Major activities in corporate finance
The entire process of corporate finance divides into three areas that allow finance professionals to manage the capital structure of companies. Here are three major activities of corporate finance:
Investments and capital budgeting
This area of corporate finance includes determining where to invest the long-term capital assets of a company. Financial managers analyse the market to find suitable assets for investment that can provide the highest returns. The process of capital budgeting may involve high risks as the overall duration between the investment and the expected return is long.
Capital financing
Capital financing involves choosing a financial mix that reflects the maximum possible value of the investments a company makes. A financial mix refers to the combination of debt and equity or the capital that companies use to meet their financial goals. The important part of this process is managing and balancing the equity and debt ratio.
Depending completely on equity may lead to dilution of the primary investor’s value and excess debt may lead to repayment default. To reduce such risks, corporate financial managers ensure the appropriate and strategic utilisation of funding sources and debts.
Here are three methods that companies can use for capital financing:
- Hedging: It provides moderate risk and profitability.
- Conservative: It provides low risk and low profitability.
- Aggressive: It provides high risk and high profitability.
Dividends and return of capital
This area of corporate finance involves making decisions on using the excess earnings of a company. In the absence of investments that earn the hurdle rate, shareholders may receive the profits as dividends or share buybacks. The form of return may depend on the preference of the shareholders. They can choose between dividends and share buybacks.
Another situation can be when companies choose to keep the extra earnings to themselves. They can utilise these earnings for future acquisitions. The process of dividend distribution may depend on the policies of the company. The rate of capital return may depend on the total return on the investment and the distribution rate.
Types of roles in corporate finance
Candidates interested in the corporate finance industry can pursue various job roles in multiple specialisations. Many companies hire corporate finance professionals to help them with managing the money required for the proper functionality of their business. These professionals focus on managing the financial plans, cash and other financial assets of companies. Here are the types of roles in corporate finance along with their responsibilities:
- Corporate finance manager
Primary duties: Corporate finance managers are responsible for monitoring the financial activities of a company. They take care of financial issues and introduce effective practices to generate new revenue streams for the company. Their main duties involve leading pitches, negotiating deals, motivating junior finance professionals and finding potential opportunities to reduce costs. They perform financial analysis and create financial models. They also assist shareholders and the management team by advising them to make the right financial decisions.
- Management accountant
Primary duties: Many organisations hire management accountants to analyse and study key financial information and use them to make financial plans. Their job is to assist senior business managers in making important financial decisions. The day-to-day duties of a management accountant include gathering financial information, developing cost-effective policies and preparing financial reports or budgets. Management accountants also focus on helping the organisation in managing its investment portfolio to support funding and budgeting.
- Financial analyst
Primary duties: The main responsibility of a financial analyst is to study past financial data and use it to analyse trends and possible risks. They predict the results and outcomes of the financial decisions that a company makes. Financial analysts are responsible for analysing investment recommendations and identifying the best available sales and purchase opportunities.
The daily job of a financial analyst may include determining the possible risks associated with investment decisions, preparing financial documents and helping the management team to take important business decisions. They also analyse the market and help the organisation in buying or selling stocks and investing funds.
- Treasurer
Primary duties: A treasurer is responsible for improving a company’s relationship with the commercial bankers, handling debt arrangements with lenders and managing corporate investments of the company. They communicate the financial strategies of the company with the investors. Treasurers may also monitor the work of accountants and other professionals working in the accounting departments. The day-to-day job of a treasurer involves preparing budgets, reports, financial forecasts and tax returns.
- Credit manager
Primary duties: Credit managers are responsible for managing the credit-granting policies of a company. Their job involves creating effective strategies to optimise the sales of the company and reduce bad debt losses. They also grant the approval of the loans based on the available data.
Credit managers keep the loan records of the company and implement necessary improvements and changes in the credit policy. They ensure loans are in compliance with the policies and reduce the risks by creating credit scoring models. The process of approving a loan requires credit managers to review the loan request and a client’s financial status.
