What Is Corporate Finance?
Corporate finance is a subfield of finance that deals with how corporations address funding sources, capital structuring, accounting, and investment decisions.
Corporate finance is also often concerned with maximizing shareholder value through long- and short-term financial planning and implementing various strategies. Corporate finance activities range from capital investment to tax considerations.
Key Takeaways
- Corporate finance is concerned with how businesses fund their operations to maximize profits and minimize costs.
- It deals with the day-to-day demands on business cash flows and long-term financing goals (e.g., issuing bonds).
- Corporate finance also involves monitoring cash flows, accounting, preparing financial statements, and taxation.
- Determining whether or not to issue a dividend is another corporate finance activity.
- Corporate finance jobs can pay attractive salaries.
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Understanding Corporate Finance
Corporate finance has three main areas: capital budgeting, capital financing, and working capital management. Capital budgeting is the process of prioritizing funds toward the most profitable projects. Capital financing is determining how a company's investments and endeavors will be financed. Working capital management is concerned with cash flow for day-to-day operations and maintaining liquidity.
While not necessarily an area of corporate finance, dividend distributions to shareholders are also a main concern because, in a publicly-owned company, shareholders are usually owners and expect returns for their investments.
Corporate Finance Activities
Corporate finance tasks include capital investing, financing, and liquidity management.
Capital Investments
Corporate finance tasks include making capital investments and deploying a company's long-term capital. The capital investment decision process is primarily concerned with capital budgeting.
Through capital budgeting, a company identifies capital expenditures, estimates future cash flows from proposed capital projects, compares planned investments with potential proceeds, and decides which projects to include in its capital budget.
Making capital investments is perhaps the most important corporate finance task and can have serious business implications. Poor capital budgeting (e.g., excessive investing or under-funded investments) can compromise a company's financial position, either because of increased financing costs or inadequate operating capacity.
Corporate financing includes the activities involved with a corporation's financing, investment, and capital budgeting decisions.
Capital Financing
Corporate finance also involves sourcing capital in the form of debt or equity. A company may borrow from commercial banks and other financial intermediaries or may issue debt securities in the capital markets through investment banks. A company may also choose to sell stocks to equity investors, especially when it needs large amounts of capital for business expansions.
Capital financing is a balancing act involving decisions about the necessary amounts of debt and equity. Having too much debt may increase default risk, and relying heavily on equity can dilute earnings and value for early investors. In the end, though, capital financing must provide the capital needed to implement capital investments.
Short-Term Liquidity
The goal of capital management is to ensure that there is enough liquidity in the short-term to carry out continuing operations. Short-term financial management concerns current assets and current liabilities, working capital, and operating cash flows.
A company must be able to meet all its current obligations when they are due. This involves having enough current liquid assets to avoid disrupting a company's operations. Short-term financial management may also involve getting additional credit lines or issuing commercial paper as liquidity backup.
Working in Corporate Finance
Positions in the area of corporate finance attract many job seekers. In fact, there's typically great competition for many of these types of jobs. Some of the many corporate finance job titles include:
- Chief financial officer
- Financial planning and analysis manager
- Cost analyst
- Financial analyst
- Treasurer
- Corporate accountant
Corporate finance salaries can vary among companies, but according to the top job site Indeed, the national average annual salaries for the positions noted above are:
- Chief financial officer: $133,898
- Financial planning and analysis manager: $113,770
- Cost analyst: $83,304
- Financial analyst: $71,556
- Treasurer: $80,428
- Corporate accountant: $66,515
What Does Corporate Finance Do?
Corporate finance departments in companies focus on solid decision-making for profitable financial results. Thus, corporate finance involves activities that relate to the budgeting of capital, the debt and equity used to finance operations, management of working capital, and shareholder dividends.
What Is Corporate Finance vs. Finance?
Corporate finance is one of the subfields of the overall finance category. The others include public (or government) finance and personal finance.
What Are the 3 Main Areas of Corporate Finance?
The main areas of corporate finance are capital budgeting (e.g., for investing in company projects), capital financing (deciding how to fund projects/operations), and working capital management (managing assets and liabilities to operate efficiently).
The Bottom Line
Corporate finance is a subset of the field of finance. It concerns proper budgeting, raising capital to meet company needs and objectives with debt and/or equity, and the efficient management of a company's current assets and liabilities. The various jobs in corporate finance can pay well.
