One vital part of a company is its corporate finance function. These employees are responsible for raising capital, allocating it, and providing a strong foundation for a corporation to grow and expand.
Without an experienced professional devising robust corporate finance strategies and determining the best way to allocate capital, these companies will have a difficult time advancing. Here is a look at the role corporate finance plays in a business and how it can maximize a business’s profits in both the short-term and the long-term.
What Is Corporate Finance?
Before understanding why corporate finance is important, it’s necessary to understand what it is. It differs from a company’s accounting in that it’s focused on capital allocation rather than on reporting a company’s historical performance. Often, particularly in smaller businesses, a corporate finance professional is a part of a company’s accounting team, but they are charged with evaluating investment opportunities and deploying capital.
Accounting focuses on recording payments and income and reporting those financial transactions to management. Accounting oversees the business’s cash flow, general ledger, collections, and reports. The accounting team looks at what makes the business profitable, manages its debt, and makes the appropriate tax payments. They are subject to Generally Accepted Accounting Principles (GAAP) and regulations to report on the overall financial health of a company.
Corporate finance, on the other hand, is less compliance oriented. Instead, it looks at how the company’s capital should be allocated and employed to maximize profits. It looks at capital structure and how capital allocation can be used to improve the company’s overall value. It’s also concerned with planning for how investors can exit the business and how they will be rewarded for their initial investment.
The Chief Financial Officer is the executive who is normally in charge of both corporate finance and accounting. The CFO, along with other company leaders, creates the financial objectives and goals of the company. Generally, the CFO has employees who focus on specific tasks, including accounting, financial analysis, and budgeting. They also devise approaches to handling financial difficulties, including a lack of investment funds or the danger of running out of operating capital.
Corporate finance focuses on the allocation of capital in conjunction with the risks associated with doing so. Capital investments are typically one-time, large purchases such as constructing a new building, purchasing a large fleet of vehicles or acquiring a new business. The finance professional has to decide if shareholders should receive dividends for their investments, if the business should seek additional investment (and in what form), and if its businesses are earning a return commensurate with its risk profile. Corporate finance professionals frequently speak in terms of return on investment, internal rate of return, net present value and cost of capital.
The corporate finance team and the company’s CFO are responsible for raising capital to fund its business needs. This means that they need to research which investments are going to help grow the company and which aren’t. Making the wrong investments can lead to poor and even fatal results.
Much of this process involves a delicate balancing act of raising money and investing it while still being in the black overall. Companies often take on extra debt during times of expansion, and the CFO has to make certain the business will be able to pay back this debt in the coming years. They also look at ways of raising money, including selling shares and borrowing money.
Once capital is raised, the corporate finance team is charged with determining, along with management, where it’s invested. This includes determining how to invest in fixed and working capital. Fixed capital funds are used to purchase equipment, real estate, and tools. Working capital, on the other hand, is the money a company needs to have on hand to operate. This includes the money needed to pay employees, purchase inventory, and operate its day-to-day operations.
A Key Part of a Business
A business’s corporate finance team is one of the vital parts of any business. It provides key information used to make financial choices, grow the business, and keep the company stable. At times, however, an external point of view and expertise is needed. That’s where Lauber Business Partners come in. If you are trying to grow your business or are in distress Lauber Business Partners is here to help you evaluate your financial choices, many of which are driven by understanding your return relative to your investment. Please reach out to us at (414) 273 – 8060 or via e-mail at firstname.lastname@example.org.