Corporate Finance – What is it, Objectives And Tools

The corporate finance are those who study the decisions to be taken within a company and how are you affect the financial situation of it. What corporate finance seeks is to increase the value and sustainability of the company, increasing its capital and growing with the decisions made.

This study focuses on finding financial solutions so that the company’s stockholders can obtain greater benefit from it, making it more sustainable within the current market, increasing its value, production, and sales. It is merely responsible for the decision-making that concerns the finances and the economic situation of the company.

Objectives of corporate finance

The main objectives of corporate finance are:

  • The capital structure of the company: with the analysis of the options and the studies of the decisions taken, it is sought to increase the capital of the company, so that it has a more sustainable economic situation.
  • Investment management: they study the possible investments of the current capital, in order to obtain a greater economic benefit, making the company move forward with the ideal investments.
  • Tax planning: this refers to the financial scope of the company, exactly the payment of taxes that must be made.
  • Cash control: with this, the area where all the movements that include cash are made is organized.
  • Analysis of finances: the study of the situation, stability, and profitability of the company in terms of its finances. Study the possible business that the company may take in the future.
  • Financing of future projects: talk about the savings fund that the company has to recognize if it is profitable to commit to other businesses, in addition to whether this would prove to be a good investment.
  • Emerging markets: study the possible profitable markets, in addition to the investment in them.

Corporate Finance Tools

Corporate finance uses essential tools for good decision making.

1# Profitability index

This focuses on the investment made and the profitability of the new project in the current market. This studies the value thrown by a certain amount of total investment.

2# Accounting performance

In a list of figures, where the total amount of investment is applied to obtain a percentage of the supposed profitability of the project. The result must be equal to or greater than the amount invested, logically, in order to make a profit. This study does not include time to obtain profits, but the total amount.

3# Internal return rates

This studies the annual profitability of the project and the results in terms of the terms obtained. The initial investment value and the results of assets over time are referenced. An annual study is usually done to find out if it has been profitable.

Decisions that include Corporate Finance

The decisions to seek the highest profitability of the company are classified into two:

  • Short-term decisions: financial decisions revolve around the number of existing liabilities and assets. The assets are based on movements such as staff salaries and liabilities on how to obtain greater sustainability. Analysts will seek to radically reduce the debts of the company, and study the actions.
  • Long-term decisions: this focuses on possible investments with the company’s own capital. The managers will decide whether it is carried out based on cash, outstanding debts or with the percentage investment of each of the company’s investors.

These are the most specific decisions:

  • Level of indebtedness and leverage: this based on the possibility of making a profit from the outstanding debts of the company, also the decision to settle outstanding commitments.
  • Need for new investments: make the decision to invest in future projects that can enhance the sustainability of the company.
  • Cash: makes decisions regarding the destination of the cash that is held as a fund. Usually, this is to settle certain debts or for investment.
  • Model to follow: they make the decisions of the path that the company will follow, as long as it is beneficial for everyone.
  • Payment: the decision is made to pay back the money that all investors have invested.

Classification of Corporate Finance

The classification of corporate finance varies according to decision making:

  • Management decisions: the tools and types of analysis used are those that classify this type of corporate finance. Here the number of personnel, the size of the company, the monthly salary and the process of growth of the company will depend.
  • Investment decisions: this works through the general study of the company with reference to the investment of the funds you have. It acts when you have the final data of the study because you already know what to invest in, whether it is an increase in personnel, new machinery for the production process, etc.
  • Decisions of dividing: this type of finance seeks to find a balance between the shareholders of the company. Try to achieve economic stability and limit the company’s resources, in order to try to have a larger investment fund or capital.
  • Financing decisions: this is about the analysis of obtaining funds to invest in a new project. Here a previous study of what the company has, its net capital, fixed assets, and liabilities, must be carried out, in order to establish a real figure, which will be directed to the investment project. In the event that the company is going through a bad financial moment, it is with the financing study, it will look for alternatives to find the necessary funds for the project.

The corporate finance is widely used within companies, as these allow you to organize and explore possible investment plans, as well as markets of the future, which may cause actual business charge more stability, also used consciously money. It is held as an investment fund or capital.

This section is of importance when the company is going through a bad economic moment and wants to make good use of its assets, helps in the growth and stability of both financial and workers.

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Ahmed Ismail

I'm a Civil Engineer. I like reading everything related to Business so I decided to launch the "Fast Grow Company" website to help Entrepreneurs in their business journey. Keep updated and follow us.

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