Better understand corporate finance

corporate finance brings together all aspects of finance related to an organization. These are aspects related to capital investment, banking, budgeting, etc. It aims to maximize shareholder value through short- and long-term financial planning. Any operation or aspect that involves Finance of an organization is part of corporate finance.

In fact, an organization needs funding for its various activities, operations and projects. It must ensure that there is sufficient funding at each stage of its development: from launch to maturity.

At the stadium launch, the company needs the financing to develop its basic infrastructure, such as establishing factories, purchasing machinery, etc.

At the stage of His development, it needs the financing to expand its business activities by entering into joint ventures and mergers and acquisitions and by financing its working capital needs.

In this post, I present to you the BA BA of corporate finance.

What is Corporate Finance?

Corporate finance involves financial decisions that an organization makes in its day-to-day business operations. It aims to use the capital available to the organization to make more money while simultaneously reducing the risks of certain decisions.

Thus, business decisions that involve the decision relating to the identification of sources of capital for financing companies are business financial decisions.

Corporate finance deals with all the financial activities necessary to operate a business. It is a whole function in the company.

In larger companies, there would be a finance department headed by a CFO with a team of finance professionals, who would manage the finances of the company.

Its functions include forecasting, planning, determining capital structure, raising sufficient funds, designing investment policy, financial negotiation and planning dividend decisions.

However, in a small business, the entrepreneur may manage this financial function himself.

What does finance mean?

In all aspects of our life, we need to know how to manage our money. This is what we called personal finances. In the case of businesses, it is essential that business owners develop and implement planning techniques to ensure the future existence of the business.

Investors should seek returns and receive returns, without taking high risks.

Running a successful business means making the most of your earned money. That is why shareholders must provide adequate financing for investments, both short and long term.

One way to increase corporate profits is through the "good use" of another's resources, i.e., the technique of "theleverage ". This technique assumes that borrowed funds are well managed and therefore perform better than equity.

Finally, to finance is to insure the financial resources necessary for the creation or operation of a business, organization, project, etc.

Scope of corporate finance

One of the primary goals of corporate finance is to increase shareholder value. The CFO's job is to make sure the funds needed to run the business are available.

Beyond providing funds, corporate finance deals with mergers, acquisitions, and related activities that affect a company's finances. Project management, taxation, cash flow management are some of the other corporate finance functions.

However, key activities of corporate finance include financial planning, finance organization, investment of funds acquired and the finance management.

Financial planning

Planning is a vital function of corporate finance. Key aspects include the amount of funding required, the amount of money to raise from external sources, the sources available to raise funds, and how the money can be used profitably.

If the finances are well planned, then running the business would be easy.

Financial organization

Once the amount of finance needed has been decided, the next activity of corporate finance is to raise funds. The different sources of business financing include:

• Loans from institutions financial
• Funds from venture capitalists
• Bank overdrafts and bank loans
• Accept deposits from the public
• Bond issue and shares
• Trade credit from suppliers
• Mortgages on the property
• Rental or hire-purchase
• Subsidies from the government or other institutions

The investment of funds

Once the funds are available, they must be invested in the business. This is called the capital budgeting.

There are two elements here: fixed capital et working capital. Fixed capital refers to the purchase of fixed assets such as land, buildings, and machinery.

Working capital refers to funds used for day-to-day operations, purchasing raw materials, paying rent and salary, etc. It is obtained by the difference between the stable resources and the fixed assets of the company.

Financial management

Regular monitoring of the use of finances is an essential part of managing finances in a business. As mentioned above, enhancing shareholder value is the primary goal of corporate finance.

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Therefore, ensuring optimal use of finances, preventing waste and abuse, and achieving maximum return on investment is something the corporate finance team should focus on.

This also involves risk management. There are various tools including software that can be used to manage finances effectively.

Why is corporate finance so important?

The reasons why corporate finance is important are:

• First, it helps decision making. Any decision taken must take into account the availability of funds.
• The goals of an organization, whether short or long term, have need funding. Whether it's profitability, customer growth; funding is needed to achieve the goals
• Then, it allows to raise the capital necessary for the operation of the company.
• Finally, financing is necessary for the expansion of a business, diversification, etc.

Without funding, a business cannot function. Planning finances, raising funds, deploying them and managing them effectively are functions of corporate finance.

What is the core business of corporate finance?

This is a question that many analysts and corporate tycoons are asking. Corporate finance refers to the business part of any organization. This is where expenses are spent to make profit.

It also includes excess business assets and cash used as collateral for loans and other transactions.

Finance is the lifeblood of any business. It can be thought of as a four-part system: personal finance, capital budgeting, working capital management, and strategic financial planning. All of these components are subsectors of business operations.

The success of a business depends on how it uses its resources. But what is the core business of corporate finance? This question is important because it helps us understand the financial activities of any business.

The core area of ​​corporate finance can be broadly divided into two segments, retail finance and financial business activities. Retail financing refers to financing secured by borrowers' assets such as homes, land, and manufactured goods.

Financial business activities include mergers and acquisitions, joint ventures and franchise ownership. The business-to-business relationship also encompasses inter-brand lending, portfolio management and captive insurance.

Thus, we find the financial activities carried out by banks, financial companies, brokers, traders, investors and buyers of financial instruments carrying out these financial activities.

The interests of corporate finance

Corporate finance focuses on four types of decisions:

• Investment decisions, which relate to the study of the real assets (tangible or immaterial) in which the company must invest.
• La funding decision, who study obtaining funds (from investors who acquire the financial assets issued by the company) so that the company can acquire the assets in which it has decided to invest.
• Dividend decisions must balance the crucial aspects of the entity. On the one hand, it implies a remuneration of the social capital and on the other hand it implies depriving the company of financial resources.
• management decisions, that affect day-to-day operational and financial decisions.

Starting from the fundamental objective of corporate finance, which is to maximize value or wealth for shareholders, one of the fundamental questions focuses on measuring the contribution of a certain decision to shareholder value. To answer this question, asset evaluation or valuation techniques have been created.

Business Finance vs Accounting

Unlike accounting, which seeks to reflect, as faithfully as possible, the operations of the company; finance focuses on the future of it, but through the study of value.

Is corporate finance necessary? The answer is yes. Here are some benefits of this process:

• Helps prevent results
• Better understand the financial aspects
• It leads to good investor decisions
• Corporate finance represents an approximation of the reality of the company
• It provides data for business forecasting and control

The most important mission of a company's managers is to generate the maximum possible value creation, that is to say, to increasingly promote the company. When invested capital generates a rate of return greater than its cost, then value is generated.

Key concepts in corporate finance

The dilemma between risk and return

In corporate finance, the more an investor expects profitability, the more he is willing to take risks. Investors are risk averse, that is, for a given level of risk, they seek to maximize returns.

Which can also be understood as for a given level of return, they seek to minimize risk.

The value of money over time

It is better to have an amount of money now than the same in the future. The owner of a financial resource must be paid something to do without this resource.

In the case of the saver, it is the interest rate. In the case of the investor, it is the rate of return or yield.

The dilemma between liquidity and the need to invest

Cash is needed for daily work (working capital) but at the cost of sacrificing higher investments.

Opportunity costs

Consider that there are always several investment options. Opportunity cost is the rate of return of the best investment alternative available.

This is the highest return that will not be obtained if the funds are invested in a particular project is not obtained.

It can also be considered as the loss that one is ready to assume, by not choosing the option that represents the best alternative use of the money.

Appropriate funding

Long-term investments must be financed by long-term funds, just as short-term investments must be financed by short-term funds.

In other words, investments must be matched with adequate financing for the project.

Leverage (use of debt)

The proper use of funds acquired through debt serves to increase the profits of a company or the investor.

An investor who receives funds lent at 15%, for example, and brings them to a company that pays 20% in theory, increases its own profits with the good use of another's resources.

However, the risk level of the investment also increases the investment, typical of a financial simulation exercise or financial projections.

Effective diversification

The wise investor diversifies his total investment by spreading his resources among several different investments. Diversification has the effect of spreading risk and therefore reducing overall risk.

In summary…

Corporate finance is a part of finance as personal finances et public finances. It focuses on how companies can create and maintain value through efficient use of financial resources.

It is a management approach to the capital budgeting process.

Similarly, it seeks to maximize value for shareholders or owners. One of the fundamental questions in corporate finance concerns the measurement of the contribution of a certain decision to shareholder value. Asset valuation (accounting) or asset valuation techniques were created.

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