Whether your business is a small start-up or if you are having an established company, the role of corporate finance is incredible and indispensable. If your company can manage the finances properly, no doubt your business is going to expand and will be running for long-term. Alternatively, if you cannot manage your company’s finance properly, no matter your business is making desired profit and growing, your company will become bankrupt and won’t be able to run the business for long term.
That is where the role of corporate finance comes in. In this article we will be learning about what is corporate finance and the relation between CEO and CFO.
What are corporate finance and the role of corporate finance?
In a layman term, corporate finance has the responsibility to check the overall company’s financial health and growth. It looks into the matters of handling finances, increasing business values, generating maximum ROI, finding the source of funds, and generating the financial reports. It completely handles the financial leadership of the business.
What are the main areas of corporate finance?
When it comes to corporate finance it is sub-divided into three sub-sections: capital budgeting, capital structure, and working capital management.
Let’s dive into the summary of each topic in detail:
- Capital budgeting: Capital budgeting is a long-term process that involves deciding which areas of business should receive funding from stakeholders and in what quantity. It basically describes the moneymaking areas of a company.
- Capital structure: Capital structure determines how a company can get the long-term financing needs such as debt, equity, or internal revenue for a business.
- Working capital management: Working capital involves managing and regulating a company’s funds for short term and borrowing short-term finances to inventories for regulating funds. Imagine the working capital of a company as a credit card where it covers short-term expenses and pays the expenses quickly in order to avoid long-term debts.
The corporate finance can also be used in investment banking, but the terms and meaning will slightly differently referring to executive-level financial management.
The goal of corporate finance:
No strategy will work unless you have no goals to achieve. The outcome of corporate finance has two effects: the first is to grow revenue and the second is to increase the shareholder’s value. Here comes to role of chief financial officer that determines how to allocate funds in the best possible way to achieve the two primary goals.
The two goals are closely intertwined that increases the shareholder’s value only when a company grows and the profit increases.
What does corporate finance entails?
Corporate finance entails the following points:
#1 Treasury:
The organization’s current financial standing depends upon the role of a treasurer. Thus, corporate finance determines how to invest the business cash in the best possible manner to grow the business and mitigates risk.
The company’s capital structure is determined by CFOs. It depends upon the chief financial officer to decide what percentage of capital should each category of finance absorb. Let’s break down into three components:
- Debt: Debt can be in the form of bank loans, bonds, notes payable, and much more that allows a company to sustain the business or grow it into the future.
- Equity: Equity can be in the form of shares that are exchanged for future pay-outs. Remember shareholders? Those individuals that hold some portion of shares in a company.
- Internal financing: Companies that acquire capital internally that includes selling of assets, generating profits, and reducing the working capital.
#2 Generating returns:
Finance executives earn the highest possible return on capital as much as they can along with the financial planning and analysis. This also determines profitability, which is the most critical part of financial success for majority of businesses.
The FA team compares two reports to track and generate a ROI need that was anticipated to ensure the organization runs for a longer period of time.
#3 Financial reporting:
Corporate finance also means reporting with the controller regarding the company’s finances that are managed and who is responsible for keeping the CFO accountable. If the information were inaccurate, it can cause serious harm to the goodwill of the company. Also, financial executives represent the historical financial information to the company and also the stakeholders in order to make decision.
Strategizing for the future:
Corporate finance is future driven while CFOs look backward to make sure what they forecasted and produced the expected results. For instance, the CFO of a restaurant will make strategies for selecting menus, locations, advertising budgets, and other efficient areas of chain.
CEO vs. CFO: How do they two works together?
The power of CEO and CFO cannot be understood because both should have a close work relationship in order to grow business effectively and to the highest degree.
If we talk about numbers around 49% of CFOs of very top companies in United States stated that they had a “very strong relationship with CEOs”. Whereas the other remaining percentage stated that they had a “difficult discussions with their company leaders.”
The CEO and CFO work together in the following ways:
- Growing the company: CEOs are always looking forward to grow the company whereas CFOs have to balance both the finances and growth.
- Determining monetary collection: CEOs and CFOs both have to make sure that the cash goes to the right places and the company does not face financial difficulties.
- Focus: CEOs focus more on sales, marketing, and overall business growth whereas CFOs have to match the company’s finances to match CEO’s vision.
Conclusion
For a company to excel in the market or industry that they are serving, it needs to have an exceptional corporate finance strategy and the best corporate finance leader. In this article we learned about the basic of corporate finance and the role of CEOs and CFOs in determining the corporate finance. In the next blog we will be learning about the elements of corporate finance.
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