Corporate Finance; The Driving Element of Finance

 


A Corporation or in other terms a Business has its own different departments to oversee different functions like Marketing, Human Resources, Operations, etc. What about the Financial decisions? Corporations make decisions with regard to ways in generating income, manage expenses, make investments, and decide how to finance those investments, etc.

So, What is Corporate Finance?

Corporate Finance focuses on how companies plan and control their financial activities including Capital Investment and Financing decisions.

Corporations make investments in income-generating assets like Machinery and Projects, To finance these investments, they have to find ways of financing in ways like issuing shares, or obtaining Bank loans. All these activities are overlooked by the Company’s shareholders who are seeking Dividends, which is their source of income. And finally, working capital decisions which are day-to-day expenses, are also involved.

When companies make decisions deciding whether to make the investment or not, are Investment decisions, If investing, deciding how to fund the investment are Financing decision.

These decisions include if the company will use equity, where they can use retained earnings or simply issue Shares. Or, if they are going to use debt sources like bank loans or cooperate bonds. They can also use both methods together.

If the investment performs well and the business starts profiting, they need to decide how to allocate those profits. These are usually allocated as dividends or reinvested back into the business. This can be done by deciding specific rates for dividends and reinvestments respectively (Payout Decisions).

and finally, the decisions related to Current Assets and Current Liabilities are Working Capital Decisions.

In summary, there are 4 types of financial decisions: Investment, Financing, Payout, and Working Capital.

Corporate finance is a subfield of Finance that focuses on the allocation and acquisition of funds, and strategies to increase the wealth of shareholders, in other terms these decisions improve the Company’s share value and ultimately increase the Wealth of investors. This is the main objective of Corporate Finance.

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