Corporate Finance refers to any and all sundry activities that pertain to the business of operating a corporation. This is typically done in a department or a division that is established with the specific goals in mind of running the financial side of the business. The main concentration of such activities and oversight lies in optimizing the stakeholder value via shorter-term and longer-term financial planning. They also endeavor to affect financially advantageous strategies. There are many different activities that fall under the overall umbrella of such financing activities. Among these is everything from investment banking to making capital investments.
Capital investments are a critical area of concern for any company. They need to decide if they ought to make a certain potential investment or not. How will they pay for it, with debt, equity, or the two combined? Will they bring in shareholders via dividends on investments in the corporation? These and other difficult questions the financial officers must wrestle with continuously. There are also shorter-term headaches for them to deal with, such as financial management of current liabilities and current assets, investments, inventory control, and other shorter-term financial issues. Among the longer-term ones are the investments and new capital equipment purchases.
The corporate finance people will spend a huge amount of time deciding their capital investments. The company needs to develop its long term capital meaningfully. It is the department of corporate finance which will have to make such decisions. This starts with capital budgeting, one of the most important financial processes. The firm will need to decide on capital expenditures for the present year, and try to accurately guestimate the resulting cash flows that will come from potential capital projects. They also have to compare and contrast possible investments against the costs they will require so that they can choose the best, most advantageous projects to write into the capital budget.
It is no exaggeration to claim that such capital investments will likely be the most critical financial task which results in real-world business operational impacts. Under-investing or over-investing can result from poor capital budget choices. This can drastically weaken the financial position of any enterprise. Companies that have a resulting inadequate amount of operating capacity or which suffer from higher financing costs because of poorly made choices can be impacted for years, decades, or permanently over these choices.
Sourcing investing capital is another critical task of the corporate finance people. They must arrange the funding with which they will invest in operations and future expansion projects though either equity or debt (or a careful combination of the two means otherwise). They could issues stocks to investors, particularly when they are looking to generate longer-term funds to expand (whether organically or through acquisitions). Alternatively, they might issue bonds on the capital markets via investment banks or borrow money from corporate banking arms of financial institutions.
This represents a true balancing act when decisions are made on the right mix of equity and debt. An over-emphasis on debt can lead to higher risks of defaulting on bonds or loans. An over-emphasis on equity will massively dilute earnings and weaken the investment positions of the earliest stake holders in the firm. Yet whatever mix is pursued by the corporate finance team, the capital will have to be effectively sourced so that capital investments can be successfully implemented in a timely fashion.
The corporate finance department also has to micromanage the shorter-term financial management of the firm. The end-goal of this is to be certain that there is more than sufficient liquidity available to the company in order to maintain its critical daily operations. This involves current liabilities versus assets, also known as operating cash flows and working capital.
The firm will have to be able to cover all of its bills and debt obligations as they become due. This means that a sufficient quantity of the current assets has to be readily converted to cash so that there will not be an embarrassing cash crunch or liquidity crisis from the normal daily and weekly company operations. This is why shorter-term financial management can pursue issuing regular commercial paper for emergency liquidity or otherwise obtaining additional lines of credit for the firm to backstop its various expenses.