In this article, we will explore corporate finance and the importance of corporate finance. Let’s start with the classification of finance and then we will explore deeply about importance of corporate finance.
The classification of finance can be categorized into three parts:
- Public finance
- corporate finance
- Personal Finance
Public finance
This type of finance is related to states, municipalities, and provinces in short government-required finances. It includes long-term investment decisions related to public entities. Public finance takes factors like the distribution of income, resource allocation, and economic stability into consideration. Funds are obtained mainly from taxes, and borrowing from banks or insurance companies.
Corporate finance
Corporate finance is about funding the company’s expenses and building the capital structure of the company. It deals with the source of funds and the channelisation of those funds like the allocation of funds for resources and increasing the value of the company by improving the financial position. Corporate finance focuses on maintaining a balance between risk and opportunities and increasing the asset value.
Personal Finance
Personal Finance is managing the finances or funds of an individual and helping them achieve the desired goals in terms of saving and investment. Personal finance is specific to individuals and the strategies depend on the individual’s earning potential, requirements, goals, time frame, etc. Personal finance includes investments in education, assets like real estate, cars, life insurance policies, medical and other insurance, savings, and expense management.
Corporate finance
Corporate finance is the area of finance dealing with the sources of funding and the capital of corporations and the actions that managers take to increase the value of the firm to the shareholders, as well as the tools and analysis used to allocate financial resources. The primary goal of corporate finance is to maximize or increase shareholder.
The objective of corporate finance:
A firm is a group of claimants of shareholders, creditors, suppliers, customers, and employees. The shareholders appoint a board of directors to see the functioning and directing of the company. The directors will act in the interest of the claimant not act in their own interest. Corporate finance theory generally agrees that the objective of a firm is to maximize profit and wealth maximization. Wealth maximization rules require managers to work towards a sustainable increase in the price of the firm stock.
van Horne: we assume that the objective of the firm is to maximize its value to its stockholders.
Brealey and Myers: success is usually judged by value. The secret of success in financial management is to increase value.
There are three principles in modern wealth maximization rules
- Profit maximization
- social welfare
- corporate growth
1. profit maximization
Profit is the excess of revenue over expenses. Profit maximization requires managers to keep low expenses.
2. social welfare
Business persons are supposed to be socially responsible.
3. corporate growth
A corporation is seen as a legal entity that has assets and liabilities as an individual and can be directly sued aside from its ownership .corporate finance therefore deals with legal financial matters of these corporations in a general sense.
However, it deals more specifically with financial investment and capital investment decisions, maximizing shareholder value, and working capital investment decisions. Many corporations therefore in corporate finance ensure maximizing of profits.
Further, it aims to discuss the management-shareholder problems often referred to in management as agent-principal conflicts regarding wealth maximization/ capital formation maximization and profit maximization/ financial returns to investment.
Corporate finance is the study of capital, financial, and investment decision-making with the main aim of maximizing capital market share value and returns for shareholders entailing greater capital accumulation and greater capital formation generally resulting in greater wealth for the corporate entity.
Importance of corporate finance
1. Decision Making
There are several decisions that have to be made on the basis of available capital and limited resources. If an organization has to start a new project, then it has to consider whether it would be financially viable and if it would yield profits. So while investing in a new project or a new venture, a company has to consider several things like the availability of finances, the time taken for its completion, etc, and then makes decisions accordingly.
2. Research and Development
To survive in a volatile market for a long duration, a business organization needs to continuously research the market and develop new products to appeal to the consumer.
It may even have to upgrade its old products to appeal to the consumers. It may even have to upgrade its old product to compete with new vendors in the market. Some companies employ people to conduct market surveys on a large scale, prepare questionnaires for consumers, and do market analysis, while others may outsource this work to others. All these activities would require financial support.
3. Raising capital
when an organization has to invest in a new venture, it is very important that it has to raise capital. This can be done by selling bonds and debentures, stock of the company taking loans from the banks, etc. All this can be done only by appropriately managing corporate finance.
4. Efficient functioning
A smooth flow of corporate finance would enable businesses to function in a proper manner. The salaries of employees would be paid on time, loans would be cleared on time, purchase of raw materials can be done when required, sales and promotions for existing products and launch of new products, etc.
5. Expansion and diversification
Before an organization decides to expand or diversify into a new arena, it has to consider various aspects like the capital available, the risk involved, the amount to be invested for the purchase of new equipment, etc. All this can be done by experts and this would be very beneficial for the organization.
6 . Depreciation of assets
When you invest in new software or new equipment, you would be required to keep aside some amount to maintain it and upgrade it in the long run. Only then you could be assured that it would yield good results over some time. In the fast-changing times of today, if this is not done, you might end up losing business if you don’t have the finances for it.
Conclusion
corporate finance is a specialized area of finance that deals with how businesses make financial decisions. It encompasses a range of activities such as capital investment, budgeting, financial planning, and the management of a company’s financial resources.
Corporate finance professionals analyze the financial needs of a company and help it make decisions related to funding, investment, and risk management. This field is critical for ensuring a company’s financial health, growth, and profitability.
