Corporate finance simply refers to the finances of corporations. That is, how they deal with funding sources, capital structuring and investment decisions. The main goal of corporate finance is to increase shareholder’s equity through financial planning and strategy implementation. In other words, it’s the science of allocating economic resources into the different areas of a business.
What is the main purpose of corporate finance?
The finance division usually works toward the same goal and that is to decide on whether they will continue with a potential business or investment and whether to finance that proposal with stockholder’s equity, debt financing or both.
To reach a decision, finance managers analyze profoundly every single detail involved in the opportunity in front of them. People working in the finance department also decide on topics such as dividends, current assets and liabilities and even inventory control.
What are the three main areas of corporate finance?
When referring to the core capabilities of the finance guys, involve capital budgeting, capital structure and working capital.
When talking of capital budgeting, we refer to the process any company does to decide on what investment decisions they should make. So, it is used to determine which assets should be bought and which shouldn’t. This is used in order to gather sufficient information about the investment proposal and making a rational judgement about it.
The combination of debt and equity used by organizations to pay for their operations and growth is called capital structure. In other words, capital allocation.
Debt refers to bonds or loans issued, while equity refers to the common / preferred stock or retained earnings side.
Net working capital ( NWC ) is the difference between the organization’s current assets ( cash, accounts receivable and inventories ), and its current liabilities ( accounts payable ).