The concept of Corporate Finance
Business firms and government organizations do need to implement various programs to achieve their goals. Corporate Finance is the area of finance that deals with providing money for businesses and the sources that provide them. It is one of the most important subjects in the financial domain. Effectiveness in the management of financial resources is key to optimize the use of natural and human resources.
Corporate Finance is primarily concerned with maximizing shareholder value through long-term and short-term financial planning and the implementation of various strategies. It is all aspects of finance related to an organization, such as capital investment, operations, banking, and budgeting. In the case of an individual, management of financial resources or funds is known as personal finance. The same is called by public finance in government organizations.
Corporate finance is used to refer to the management of funds in the context of the business firm. Its activities range from capital investment decisions to investment banking. Thus, finance as a discipline is classified into three domains: public finance, business finance, and personal finance. Public finance is the management of funds for governments: both local government and central government. Personal finance refers to the management of funds of an individual.
Generally, business finance, corporate finance, and financial management, and managerial finance are used as a synonym of each other. The basis of corporate finance is the separation of ownership and management. At the early stage of the development of finance as a separate discipline, academics and practitioners used business finance. Later on, they used corporate finance instead of business finance. Traditionally, corporate finance used to focus only on the procurement of funds required to set up a company or corporation and expansion of its activities.
Now, corporate finance is not limited to the fundraising activities; it has widened to cover the acquisition, financing and management aspects of a corporation’s assets. The process is intended to maximize the value for shareholders by a combination of short and long term financial planning. This approach to the concept of corporate finance is known as a modern concept.
In short, corporate finance is the study of the ways to address the following issues in a firm.
- What long-term investments should a firm take on?
- Where the firm will get the long-term fund to pay for investment?
- How the firm will manage its everyday financial activities such as collecting from customers and paying to suppliers.
- How the firm should go about deciding upon payment to stockholders?
Therefore, corporate finance deals with acquisition and financing management of a firm’s assets that lead to shareholders wealth maximization.