Corporate finance is the backbone and the language of business health. We want to explore here some of the basics of corporate finance as well as how it fits into other business disciplines.
Finance can be broken into four groups: Corporate Finance, Investments, Financial Institutions, and International Institutions.
While the topic here is corporate finance it is a little misleading – perhaps business finance would be more appropriate.
Investments deal with financial assests such as stocks and bonds. Some things to consider here are what determines asset price such as a stock, what is the risk reward ratio for owning an asset, what is the best mix of financial investment to own. There are a few career paths to go with investments ranging from stock broker to portfolio manager to security analyst.
Financial institutions are essentially businesses that deal with financial matters. These would include banks and insurance companies for instance.
International Finance isn’t so much an area but rather a specialization in one of the above areas. Basically jobs related to this are one of the above but in another country to the one you are currently in.
Regardless of the business you start you have to think about a few things related to finance. What lines of business will you be in? What long term investments should you take on? Where will you get the financing for these? And finally, how will you manage all of this? These aren’t all of the questions that you need answered but they are definitely important ones.
In a company the top person who manages is usually the CFO or VP of Finance. The VP of Finance coordinates the activities of the treasurer and controller. The controller’s office handles cost and financial accounting, tax payments, and management information systems. The treasure’s office focuses on managing the firm’s cash and credit, financial planning, and capital expenditure.
When thinking about financial management decisions there are three basic types that should be under consideration : Capitan Budgeting, Capital Structure, and Working Capital Management.
Capital Budgeting is the process of planning and managing a firm’s long term investments. Here we try to identify investment opportunities that are cheaper to buy then they are actually worth to others that want to buy. A focus must be around the size, risk, and timing to receive the cash flow in excess of the cost of purchase.
Capital structure is the second point of emphasis and refers to the long term debt and equity the company uses to support long term investments. We must determine here how much to borrow and what the least expensive sources are to the firm. In addition we must determine how and when to raise money.
Working Capital Management refers to the firm’s short term assets, liabilities, and money owed to suppliers. Some considerations are how much cash and inventory should be on hand? Should we sell credit to clients? And…how will we obtain any needed short term financing.
There are a few different types of organizations that will leverage business finance. These include Sole Proprietorship, Partnership, and Corporation.
A sole proprietorship is owned by one person and is the simplest type of business. These are owner operators that keep all of their profits but have unlimited liability in debts. Similarly there is no distinction between business and personal income.
A partnership is where there are two or more owners to a business. All partners share gains and losses which are structured in a partnership agreement. In a limited partnership one or more general partners will own the business and have unlimited liability, but there will be one or limited partners that will not participate in the business.
A corporation is a legal person separate and distinct from the owners, and has many of the rights, duties, and privileges of an actual person. A corporation is somewhat more complicated to start than other forms of a business organization. Forming a corporation involves preparing articles or incorporation and a set of bylaws. The articles of incorporation must include the corporation’s name, it’s intended life, it’s business purpose, and number of share issued. The bylaws describe how the corporation regulate its own existence. In larger corporations the manager and shareholders are different people while in smaller companies they can be the same. A corporation can have several advantages ranging from ownership can be easily transferred to limited liability for owners. There are a few different type of companies such as joint stock ventures, public limited companies, or limited liability companies.
The goal of financial management is ultimately profit maximization. However, this goal is somewhat broad and could refer to long run or average profitability. In addition we must consider what the stock holder considers a good financial decision which simply means maximizing the current value per share of the existing stock. Finally, the third goal is to maximize the market value of the existing owners’ equity.