Loading the player...

What is 'Corporate Finance'

Corporate finance consists of the financial activities related to running a corporation, usually with a division or department set up to oversee the financial activities. Corporate finance is primarily concerned with maximizing shareholder value through long-term and short-term financial planning and the implementation of various strategies. Everything from capital investment decisions to investment banking falls under the domain of corporate finance.

BREAKING DOWN 'Corporate Finance'

Among the financial activities with which a corporate finance department is involved are capital investment decisions. Should a proposed investment be made? How should the company pay for it with equity or with debt, or a combination of both? Should shareholders be offered dividends on their investments in the company? These are just some of the questions a corporate financial officer attempts to answer on a consistent basis. Short-term issues include the management of current assets and current liabilities, inventory control, investments and other short-term financial issues. Long-term issues include new capital purchases and investments.

Capital Investments

One of the tasks in corporate finance is to make capital investments, and the corporate finance department is responsible for the deployment of a company's long-term capital. The decision process of making capital investments is mainly concerned with capital budgeting, a key corporate finance procedure. 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 that causes over-investing or under-investing could put a company in weaker financial condition, either because of increased financing costs or having an inadequate operating capacity.

Capital Financing

In addition to handling the use of investment capital, 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 raising long-term funds 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, with a goal to ensure enough liquidity to carry out ongoing operations. Short-term financial management concerns exclusively 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 assets that can be cash-ready, such as short-term investments, to avoid any liquidity or cash crunch from disrupting a company's operations. Short-term financial management may also involve getting additional credit lines or issuing commercial papers as liquidity back-ups.

RELATED TERMS
  1. Capital Investment

    Funds invested in a firm or enterprise for the purposes of furthering ...
  2. Cost Of Capital

    The required return necessary to make a capital budgeting project, ...
  3. Capital Note

    Short-term unsecured debt generally issued by a company to pay ...
  4. Capital Markets

    Capital markets are markets for buying and selling equity and ...
  5. Long-Term Debt To Capitalization ...

    A ratio showing the financial leverage of a firm, calculated ...
  6. Capital Structure

    A mix of a company's long-term debt, specific short-term debt, ...
Related Articles
  1. Small Business

    What Does Corporate Finance Do?

    Corporate finance is the subset of finance that involves how corporations use leverage to fund their operations and capital purchases.
  2. Small Business

    Explaining Cost Of Capital

    Cost of capital is the cost of funds used to finance a business.
  3. Small Business

    What is Equity Financing?

    Companies that are short on cash may need financing to pay for short-term needs or long-term capital expenditures.
  4. Small Business

    Understanding Capital Investment

    Capital investment is a term that describes a company’s expenditures for long-term assets used in the operation of its business.
  5. Investing

    The Optimal Use Of Financial Leverage In A Corporate Capital Structure

    The amount of debt and equity that makes up a company's capital structure has many risk and return implications.
  6. Managing Wealth

    What is Capital Stock?

    Capital stock refers to the number of authorized shares a corporation may issue, both common and preferred.
  7. Small Business

    Understanding Capital

    Capital has a variety of meanings, but it generally refers to financial resources.
  8. Investing

    Advantages of Maintaining Low Working Capital

    Understand the benefits and advantages of maintaining low working capital as related to liquidity needs, capital allocation and operational efficiency.
  9. Small Business

    Is Equity Financing the Right Choice for Your Business?

    Discover the benefits and drawbacks of equity financing for a small business, and learn when equity financing should be used instead of debt financing.
  10. Investing

    What is Debt Financing?

    When a company needs to pay for something, it can pay with cash, or it may finance the purchase. Financing means that it gets the money from other businesses or sources, in return for obligations. ...
RELATED FAQS
  1. What role do shareholders play in a capital budget?

    Learn about why shareholders play an integral role in capital budgeting and how it benefits businesses to use equity capital ... Read Answer >>
  2. How can working capital affect a company's finances?

    Understand how working capital may affect a company's financial strength and investment effectiveness, as it changes from ... Read Answer >>
  3. How does a company choose between debt and equity in its capital structure?

    Learn about the benefits and drawbacks of debt and equity financing and how companies compare different capital structures ... Read Answer >>
  4. What does high working capital say about a company's financial prospects?

    Learn about net working capital and what a high figure indicates about a company's financial prospects, including the importance ... Read Answer >>
  5. What are the benefits and shortfalls of the Herfindahl-Hirschman Index?

    Learn about the differences between equity and debt financing and how they impact financials. Find out how businesses determine ... Read Answer >>
  6. What is the difference between capital investment decision and current asset decision?

    Learn how capital investment decisions are long-term funding decisions, while current asset decisions are short-term funding ... Read Answer >>
Hot Definitions
  1. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  2. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  3. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  4. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
  5. Yuppie

    Yuppie is a slang term denoting the market segment of young urban professionals. A yuppie is often characterized by youth, ...
  6. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
Trading Center