Corporate Finance Simplified: Startegies Behind Big Business Decisions

Corporate Finance Simplified: Startegies Behind Big Business Decisions

 

What is Corporate Finance

Corporate Finance is the backbone of a company, concentrating on the management of various funding resources for the company, its capital expenditure and investment decisios to enhance the business value.  The job landscape in corporate finance is changing quickly with the impact of digital transformation, sustainability trends and shifts in the global economy.

Sustainable investing, digital transformation and global economic shifts are factors boosting the demand for skilled professionals, corporate finance that focuses on how companies manage their financial decisions and structure their capital to maximize value and achieve their strategic goals. 

Key Objective of Corporate Finance

• Maximizing shareholder value : Increase wealth through efficient financial management. 
• Efficient Capital Allocation : Allocate resources to projects with optimal returns.
• Risk Management : Identify and mitigate financial risk associated with business operation and investments. 

The main area of corporate finance are

• capital budgeting (e.g. for investing in company projects),
• Capital financing (Deciding how to fund projects/operation) and
• working capital management (Managing assets and liabilities to operate efficiently).

Which areas belong to Corporate Finance?

In practice, corporate finance can be dividend into several decision areas that can have either a short-term or a long-term decision horizon. However, the main goal is always to increase the return on capital or reduce the cost of capital in order to ulƟmately increase the value of the company. At the same time, no risk should be taken that exceed the company’s capability.

These are the main fields of activity :

• Investment decisions
• Decisions on investments
• Decisions on financing
• Decisions on distributions (dividend)
• Short-term financial planning (management of current assets)

Investment decisions

Management has two basic ways of dealing with excess cash. It can invest long-term in the capital structure, in projects (e.g. research and development) or in fixed assets. The goal here is always to maximize the value of the company. If there is no possibility of investing free liquidity in capital investments or contributing it to the capital structure, it should be distributed to the shareholders. Investment decisions in the area of corporate finance therefore include dividend policy as well as investment and financing decisions. 

Decisions on investments

Naturally, the company has only limited resources at its disposal. Business areas and projects often complete for budgets. An important task of corporate finance is therefore to make sound investment decisions. To achieve this, the ROI of each investment opportunity must be assessed as accurately as possible. As a rule, projects with the highest return on capital are the first to be implemented. Other valuation methods are the break-even analysis, the present value method, the equivalent annual cost method (EAC) and the so-called internal rate of return.

Decisions on financing

Decisions in corporate finance involve determining how a company will raise and manage its capital to fund operations and investments. These decisions are crucial for a company’s financial health and long-term success, influencing its capital structure, risk profile, and ability to achieve its objectives. 

Decisions on distribution (dividends)

Dividend decisions involve determining how much of a company’s profits to distribute to shareholders as dividends and how much to retain for future investments or operations. These decisions are crucial because they impact a company’s capital structure, stock price, and the tax burden on shareholders.

Short-term financial planning (management of current assets)

Short-term financial planning, also known as current asset management, focuses on managing a company’s short-term assets and liabiliƟes to ensure sufficient liquidity for daily operations and obligations. It involves optimizing working capital, managing cash flow, and making decisions about current assets like cash, accounts receivable, and inventory. Example..

Key aspects of short-term financial planning:

• Cash Management : Ensuring the company has enough cash on hand to meet immediate obligations and managing cash inflows and ouƞlows to avoid shortages or surpluses. 
• Working Capital Management : Managing current assets (cash, accounts receivable, inventory) and current liabilities (accounts payable, short-term debt) to maintain optimal levels of liquidity and profitability. 
• Short-term Financing : Making decisions about borrowing and lending within a short-term period (typically less than a year) to cover any shorƞalls or invest excess cash. 
• Forecasting : Projecting future cash flows and working capital needs to anticipate potential shortfalls or nsurpluses and plan accordingly. 

Examples of short-term financial planning:

• Creating a cash budget : A detailed plan that forecasts cash inflows and ouƞlows over a specific period (e.g. monthly or quarterly). 
• Optimizing inventory levels : Balancing the need to hold enough inventory to meet customer demand with the cost of holding excess inventory. 
• Managing accounts receivable : Setting credit policies, monitoring customer payments, and potentially factoring receivables to accelerate cash inflows. 
• Making short-term investments : Investing excess cash in liquid assets like short-term securities to earn a return while maintaining liquidity. 
• Securing short-term financing: Utilizing lines of credit, short-term loans, or other financing options to cover short-term funding needs.
  Effective short-term financial planning is crucial for a company’s stability and ability to meet its obligations, enabling it to operate smoothly and capitalize on opportunities.

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