What Is Corporate Finance?

Corporate finance is the subfield of finance that deals with how corporations address funding sources,
capital structuring, accounting, and investment decisions.

Corporate finance is often concerned with maximizing shareholder value through long- and short-term
financial planning and the implementation of various strategies. Corporate finance activities range from
capital investment to tax considerations.

KEY TAKEAWAYS

 Corporate finance is concerned with how businesses fund their operations in order to maximize
profits and minimize costs.

 It deals with the day-to-day operations of a business' cash flows as well as with long-term
financing goals (e.g., issuing bonds).

 In addition to capital investments, corporate finance is concerned with monitoring cash flows,
accounting, preparing financial statements, and taxation

Understanding Corporate Finance

Corporate finance departments are charged with governing and overseeing their firms' financial
activities and capital investment decisions. Such decisions include whether to pursue a proposed
investment and whether to pay for the investment with equity, debt, or both. They also include whether
shareholders should receive dividends, and if so, at what dividend yield. Additionally, the finance
department manages current assets, current liabilities, and inventory control.

Corporate Finance Tasks

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 that 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 is also responsible for 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 in terms of deciding on the relative amounts or weights between 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, capital financing must provide the capital needed to
implement capital investments.

Short-Term Liquidity

Corporate finance is also tasked with short-term financial management, where the goal is to ensure that
there is enough liquidity to carry out continuing operations. Short-term financial management concerns
current assets and current liabilities or working capital and operating cash flows. A company must be
able to meet all its current liability obligations when 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 papers as liquidity backups