Corporate Finance: Know its importance for a Certified Management Accountant
In simple words, corporate finance can be understood as the financial operations that revolve around a business. Businesses work on the principle of surplus appropriation by shrewd management of the financial aspects. This type of finance, whose ultimate goal is to help a corporate in its business, is known as corporate finance. On the other hand, Certified Management Accountants are those professionals who do the cost auditing of a firm and thus, must be well-versed in corporate finance. This is incorporated in this specially designed CMA Certification Course.
Importance of Corporate Finance
Corporate finance gives a dynamic approach to professionals like Certified Management Accountants. It helps them to make sound financial decisions and also to conduct research for further financial growth and development. It thus helps to manage financial risks and ensures the smooth running of the company's business.
Corporate finance is extremely important in raising capital for the company. Corporate finance includes various components that help in raising funds, both internally as well as externally. Corporate finance is the backbone of the growth and expansion of a company.
Components of Corporate Finance
As we have already seen above, corporate finance also includes the raising of capital for a business. The various sources from which capital is collected for a business, are known as the sources or components of corporate finance. Based on the ownership of the capital, the components are divided into 'owned' and 'borrowed' capital.
As the names suggest, in 'owned' capital, money is collected from sources owned by the business. For example, equity shares. On the other hand, 'borrowed capital' refers to the money collected from those sources whose ownership doesn't lie with the business. Examples are bonds and debentures.
Types of Owned Capital
Owned Capital can further be classified into the following components:
1. Shared Capital
If a private or public joint-stock company has multiple members, each of those members can invest some money to create a pool of capital. Since this capital is sourced from the members of the company themselves, therefore this falls under owned capital. Moreover, since the total available pool of capital is shared among the members, it is also known as 'shared capital'. So when you buy a share of a company, you become a part of its ownership team. The money that you pay to buy that share, becomes part of the company's 'shared capital'.
Shares can further be divided into two types — equity shares and preferential shares.
Following are a few differences between equity shares and preferential shares:
Equity shareholders are the actual owners whose dividends are linked to the company's earnings. If the company earns more, the dividends increase, and vice-versa. Whereas, in the case of preference shares, the rate of dividend remains fixed. However, preference shares have one advantage over equity shares — their dividends are given more priority than those of equity shares.
2. Retained Capital
Retained Capital is also known as retained earnings. When a company registers a profit, some amount of that profit is dispensed as dividends to the shareholders whereas another part of the profit is kept as capital which can be later used for the company's operations. This quota from the profit which is retained and re-infused to finance the business is known as 'retained capital'.
Types of Borrowed Capital
Following are some of the types of borrowed capital:
Debentures are loan instruments used by companies to raise external capital. Creditors lend an amount to the company which is required to be repaid on the date mentioned in the instrument. The company also needs to pay interest on the amount borrowed. In UK, debentures are known as 'bonds'.
2. Public Deposits
These are short-term, cheap, unsecured loans raised mainly by public joint-stock companies. They borrow money from the general public which is to be repaid within a short period. Public deposits cannot be more than 25% of the total owned capital of a company. Public deposits offer a higher rate of interest to creditors, than bank deposits.
3. Bank Loans
A bank loan is another common method of raising 'borrowed capital'. These are secured loans with a higher rate of interest than public deposits.
How to choose the best CMA Certification Courses to learn Corporate Finance
As we have already learned, Corporate Finance is a key concept required to strengthen a business. Professionals like Certified Management Accountants who ensure the smooth conduction of financial affairs in business must be experts in corporate finance. Therefore, it is important to choose the best CMA Certification Course offered by Imarticus which includes all important concepts of corporate finance.