Corporate finance is the area of finance that deals with sources of funding, the capital structure of corporations, the actions that managers take to increase the value of the firm to the shareholders, and the tools and analysis used to allocate financial resources. The primary goal of corporate finance is to maximize or increase shareholder value. Corporate finance activities range from capital investment decisions to investment banking.
The terms corporate finance and corporate financier are also associated with investment banking. The typical role of an investment bank is to evaluate the company’s financial needs and raise the appropriate type of capital that best fits those needs. Thus, the terms “corporate finance” and “corporate financier” may be associated with transactions in which capital is raised in order to create, develop, grow or acquire businesses.
Corporate finance plays a vital role in every business. Irrespective of the size or type of business operations, every company seeks to streamline its corporate financing arm for optimum wealth distribution and return generation. The ultimate purpose of corporate finance is to maximize the value of a business through planning and implementation of resources, while balancing risk and profitability.
Corporate finance meaning thus, from our service package point of view, extends to an array of financing and investment decisions that encompass four primary aspects, viz:
1. Investments and Capital Budgeting
Investing and Capital Budgeting includes
- Business/ Growth planning, mergers and acquisition (M&A) planning
- Investment Banking advisory
- Capital Budgeting
- Planning Finances
- Business Valuation (difference between equity and enterprise valuation)
Here plans are made in order to generate the highest risk-adjusted returns.
2. Capital Financing
This is the core part of corporate finance and it generally includes
- Structure/ Restructure Capital (optimal mix of finance)
- Raising Capital
- Equity Capital- Through owner funding, right issues, public offers, alternative funding like private equity, early stage VC funding, private placements, divestitures, equity co-investments, etc
- Debt Capital- Senior revolving and term loans, subordinated debt, private debt, leveraged recapitalizations, convertible debt, working capital facilities, issuance of corporate securities, etc
- Mezzanine Financing- Placed between senior debt and equity
- Capital structure optimization
- Maintaining the relative amounts or weights between debt and equity capital to ensure lowest possible Weighted Average Cost of Capital (WACC) and lower dilution in earnings and value for original investors.
3. Implementation/ Monitoring
- Management of working capital for efficient day-to-day running of the business.
- Corporate financial services extending to the advisory role during M&As.
- Development of financial strategies for policy implementations, which also reflect the working of advanced corporate finance.
- Growth strategies in line with the core organizational to achieve the desired valuation.
- Management consulting to optimise operational efficiency, business performance and effective utilization of capital.
4. Dividend and Return of Capital
This activity requires corporate managers to decide whether to retain a business’s excess earnings for future investments and operational requirements or to distribute the earnings to shareholders in the form of dividends or share buybacks.
- Dividend decisions which include analysis of stockholders’ returns basis amount and time.
- Analysis and implementation of refinancing and restructuring strategies that help maximise the business’s returns.
Corporate finance refers to activities and transactions related to raising capital for the creation, development and acquisition of a business. It is directly related to company decisions which have financial or monetary impacts.
Dileep K Nair