Importance & Scope Of Corporate FinanceApril 26, 2017
One can describe corporate finance as managing financial activities involved in running a corporation. It involves managing the required finances and its sources. The basic role of corporate finance is to maximise the shareholders’ value in both short and long-term.
Corporate finance understands the financial problems of the organisation beforehand and prevents them. Capital investments become an important part of corporate financial decisions such as, if dividends should be offered to shareholders or not, if the proposed investment option should be rejected or accepted, managing short-term investment and liabilities.
Corporate finance is different from business finance, while business finance refers to finance to all types of business such as partnership firms, joint stock companies, etc.., corporate finance includes, planning, raising, investing and monitoring of finance in order to achieve the financial goals of the organisation.
In the planning phase, corporate finance needs to get a clear perspective on certain aspects, essentially the finance of the company has to be decided on questions like, what are the sources of finance, how much finance is required by the company and will it be profitable?
Making capital investments is perhaps one of the most important tasks of corporate finance, which has serious business implications. To raise the finance, the corporate finance has to raise money from the company with the assistance of sources like shares, debentures, banks, financial institutions, creditors etc.., a company may also choose to sell stocks to equity while raising long-term funds for business expansion. Capital financing is a very delicate balancing act. Corporate finance is also supposed to manage short-term financial management with a goal to have enough liquidity to carry out other operations of the organisation.
There are two types of corporate finance, fixed capital and working capital. As the name suggests fixed capital is used to purchase fixed assets like land, building, property, machinery, etc.., while working capital is generally used to purchase raw material and manage day to day fixed expenses like overheads, salaries etc. Financing and investing decisions are like two sides to the same coin. The organisation raises finances only when they have suitable projects. In corporate finance there are various tools and techniques which help take appropriate informed investing decisions, hence it is very vital for the financial health of an organisation.
Monitoring the Finance / Managing Risks
Monitoring finance is a science, there is a method to it, it is a very complex job. It requires many tools and techniques. Corporate finance has to control and manage the finance of the company, they have to minimise the risk of investment and at the same time assure maximum returns on the invested capital.
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So to conclude, finance is the bloodline of any business, it is required in all kinds of setups, big or small, it is required across all phases in the lifecycle of an organisation, to initiate, build stability, survival, and also in the growth of an organisation. Promotional finance is required to start a company, long-term finance is required to build assets, and development finance is required for growth, expansion and diversification of a business.