Corporate finance plays a vital role in maximising the financial soundness of an organisation and its stockholders. The departments that work under this branch of finance mainly manage the financial activities of a company. They make important decisions about investments, capital allocation and organisational budgeting.

If you want to learn more about corporate finance, you’re in the right place. Here’s the only guide to corporate finance you’ll ever need.

What is Corporate Finance?

Corporate finance is a subfield of finance that deals with the way organisations address capital structuring, funding sources, investment decisions and accounting. It refers to transactions and activities related to raising capital to develop, acquire and create a business. 

Corporate finance is directly related to the organisation’s decisions which have a monetary or financial impact. Think of it as a liaison between the company and the capital market.

One of its key objectives is maximising shareholder value via short and long-term financial planning and implementation of different strategies. Corporate finance-related activities include financial planning, budgeting, tax planning, and investment of idle money for maximum returns.

Corporate finance plays a major role in all businesses. Regardless of the type or size of business operations, all enterprises aim at streamlining their corporate financing arm to generate better returns and optimal wealth distribution.

Read more: Business Banking – All You Need to Know

Top Benefits of Corporate Finance

Here are some of the major benefits of corporate financing. 

1. Efficient business operations

Well-planned corporate finance ensures that your business’ finances are in top shape and capital allocation is streamlined effectively. 

This means that your loans are cleared on time, you are able to buy raw materials as required, employee salaries are paid on time, new product launches go as planned, and marketing efforts for said new products as well as the existing ones are well-budgeted.

2. Research and development

Market and product research requires considerable funding resources, both material and human, to be conducted effectively. Running out of funding at any point during the process would mean a lot of work and work hours going to waste. Well-planned corporate finance would help ensure steady financial support for research efforts that ultimately help your business succeed.

3. Keeps expansion plans on track

Modern techniques and equipements are necessary for the diversification and expansion of an enterprise. Planning your corporate finance in advance will ensure that you have a steady flow of funds to acquire future-forward technology and equipment for your business.

4. Operation management

Corporate finance plays a vital role in the coordination and control of various activities in an enterprise. For instance, your production will drop if the finance department does not offer sufficient finance to buy raw materials and meet other daily financial needs for running the production unit smoothly. This would further make sales suffer, and eventually, affect your profits.

5. Timely payment of fees & taxes

Your organisation needs to pay taxes to the government, which includes Goods and Service Tax (GST) and Income Tax. You may also be required to pay fees to the Registrar of Companies. Accounting for these while planning your corporate finance helps pay these fees and taxes.

6. Risk management

Your company needs to manage several risks like a loss because of natural calamity, sudden drop in sales, loss due to strikes, etc. Provisioning for these while planning your corporate finance proves to helps manage such risks.

7. Streamlined Asset allocation

Well-planned corporate finance helps you keep funds handy for the replacement of fixed assets that get worn out over the years.

8. Interest and dividend payments 

The right amount and timely arranged corporate finance help companies pay interest to banks or creditors as well as dividends to shareholders in a timely and efficient manner.

9. Improves decision-making

A majority of the vital business decisions in organisations are determined by considering fund availability. Performing any function independently without finance is challenging in an enterprise. 

Types of corporate finance

Corporate financing includes raising funds either through debt or equity. These are the two primary types of corporate finance:

  • Debt financing

Debt financing refers to acquiring funds via loans, usually through bond issuance, from financial institutions. You would have to make the principal repayment and interest payments by or before the end of the loan tenure.

An excessive amount of debt induces the risk of defaulting and gives rise to the possibility of bankruptcy.

Debt funds come in several options like private financing, corporate loans, debentures, and the like. Debentures can be issued for refinancing to the general public. On the other hand, the primary source of private finance is institutional lenders.

  • Equity financing 

Organisations can raise finance by using up their retained earnings, or by equity issuance. Equity comes in the form of preferred stock, common stock etc. 

To sell its shares, a company can get itself listed on a stock exchange, or it can do so via over-the-counter (OTC) exchanges. Excessive equity dilutes the voting rights of shareholders and lowers the dividend per share.

Activities which govern corporate finance

The top three activities that primarily govern corporate financing are: 

  • Return of capital and dividends

This requires corporate managers to decide whether to distribute the earnings to shareholders in the form of share buybacks or dividends or to retain the excess earnings of a business for future operational requirements and investments.

Retained earnings which are not distributed to shareholders should be utilised to fund the expansion of a business. It does not dilute the value of equity by issuing more shares nor incur additional debts. That’s why this often proves to be the best source of funds.

Eventually, as someone managing corporate finance, you must pursue a capital investment if there are chances of earning a rate of return on it, which is higher than the organisation’s cost of capital. Otherwise, they must return the excess capital to shareholders through share buybacks or dividends.

  • Capital budgeting and investments

Capital budgeting and investing include planning regarding where to place the long-term capital assets of an organisation to produce the highest risk-adjusted returns. This involves deciding whether to pursue an investment opportunity or not, and is accomplished via extensive financial analysis.

By utilising financial accounting tools, you can estimate cash flows from proposed capital projects, can compare planned investments with projected income, identify capital expenditures, and decide which projects you should include in the capital budget.

Financial modelling is utilised to forecast an investment opportunity’s economic impact and compare alternative projects. Many times, an analyst uses the Net Present Value (NPV) and Internal Rate of Return (IRR) to draw a comparison between projects and choose the optimal one.

  • Capital financing

Capital financing includes decisions regarding how to finance capital investments optimally via the business’ debt, equity, or a combination of both.

You can acquire long-term funding for major capital investments or expenditures by issuing debt securities in the market via investment banks, or by selling company stock.

The key is to balance the two sources (debt and equity). Eventually, corporate finance professionals optimise the capital structure of an organisation by reducing its WACC (Weighted Average Cost of Capital) as much as possible.

Corporate banking services

Corporate banking services typically comprise of 

  • Treasury services

Treasury services are used to manage the working capital needs of organisations. As these services help facilitate currency conversion, they are highly important for MNCs.

  • Employer services

Commercial financial institutions offer services like employee payroll facilities and a selection of healthcare and retirement plans.

  • Fixed asset requirement financing

This proves to be vital for corporates who are engaged in capital-intensive industries like information technology, heavy machinery manufacturing, transportation, etc. Financial institutions facilitate lease agreements and customised loans for the purpose of buying machinery, equipment, etc.

  • Corporate net banking

Corporate net banking allows corporate customers or non-individual customers like companies, trusts, proprietorship concerns, partnerships, firms, etc., to do banking online anytime and anywhere. This facility enables seamless processing of bulk transactions via Internal Funds Transfer/ RTGS and Salary Payments, hence lowering the turnaround time effectively. 

Explore the best of corporate netbanking with RazorpayX. Get:

  • Unlimited multi-user access for your finance team & CA
  • #DoLessSaveMore with a powerful Corporate Card
  • our newly launched Magic Checkout solution improves the checkout rate by 20%
  • Handle payroll and compliances in 3 clicks with our top-of-class Payroll TollImp

I’m in!

  • Commercial services

Banks extend services like analyses of real assets, equity and debt restructuring, leverage analysis, portfolio analysis, etc. Some other vital services for corporate clients are underwriters for IPOs (initial public offerings), asset management services, etc.

  • Credit

Through corporate banking, you can opt for loans and other credit-related products. Notably, credit facilities contribute the biggest share of profits for commercial financial institutions. However, one must note that the interest rates that are imposed on loans are considerably high owing to the risk factor associated with lending to corporate customers.

As a business owner in India, you can raise corporate finance from multiple reputed financial institutions. These lenders provide an array of loans that proves helps you address your capital requirements. Some of their offerings include SME/MSME loans, unsecured business loans, machinery and plant loans, etc. Further, these come with flexible tenures, enabling you to tailor their repayment timelines based on your cash flow.

FAQs

1. What is corporate financial management?

Corporate financial management is the practice or act of developing plans and strategies and making investment decisions which have a positive impact on an organisation’s operations. It involves setting targets, planning to achieve them, and deciding the best way to pay for them.

2. How important is an organisation’s capital structure in corporate finance?

The capital structure of an organisation is vital for maximising the business’ value. Its can be a mix of short and long-term debt and/or preferred and common equity. The ratio between a company’s liability and its equity often forms the basis for determining how risky or well-balanced is the organisation’s capital financing. Thus, an organisation which is heavily funded by debt has a more aggressive capital structure & holds more risk for stakeholders.



Author

Aspiring writer. Animal rights enthusiast. Marketing novice.

Write A Comment