Introduction
Corporate Finance is a subfield of finance concerned with how corporations handle funding sources, capital structuring, accounting, and investment decisions. Corporate finance is frequently charged with increasing shareholder value through long-term and short-term planning. Corporate finance activities range from capital investment to tax considerations.
In addition to capital investments, they are also given the task of monitoring cash flows, accounting, and preparing financial statements. Besides this, they carry out valuable activities like which investment activities need to be pursued. How do we pay for these investments via debt or equity etc? Also, decisions such as which shareholders should receive dividends and to what extent, fall into the purview of corporate finance.
How does Corporate Finance Work?
As it has been seen earlier corporate finance usually deals with maximizing returns to the shareholders of a company and its stockholders. Hence, it is but natural to observe that they are entrusted with organizational budgeting, investments, and capital allocation.
Functions of Corporate Finance
To illustrate this for example the corporate finance division may be given the task of computing capital requirements in order to acquire assets as well as find the most efficient sources of this capital acquisition. A key aspect of this decision-making is how do we finance this decision whether it be through debt or equity or both. At the same time, it requires one to make decisions that optimize working capital requirements.
It is necessary here to make a distinction between corporate finance and corporate accounting. The main difference here is that the corporate finance team is entrusted more with the strategic aspects of a decision such as a strategy formulation, planning, and directing while the corporate accounting team is entrusted with the day-to-day management of business and activities such as maintaining accounting records and preparing financial statements.
Principles of Corporate Finance
There are a few principles that guide the corporate finance function. They are as follows:
Principles of Corporate Finance
Investment principle –
This emphasizes the importance of weighing risk versus return. The evaluation of an investment proposal should be based on a hurdle rate that serves as a benchmark. It is important to ensure here that the risks do not overtake the returns.
This primarily requires thoughtful planning and deciding where to invest from a long-term perspective. This means deciding after a careful analysis as to whether or not to pursue an investment activity and whether to invest in a manner such that the highest risk minimized returns are got by the company. To accomplish this financial accounting tasks such as identifying capital expenditures, estimating cash flows, and comparing planned investments with projected income are used. Besides, financial modeling is also used with the help of techniques such as IRR and NPV to compare projects and choose the right ones
Financing principle –
It emphasizes on maximizing returns from a given investment. Here the task is to assess which financing technique to use namely debt financing, equity financing, or a combination of both. Important considerations here are factors such as business structure and goals, cost of financing, interest rate calculation, and access to the equity market.
This activity is mainly associated with delving into which is the optimal way of financing a given project. The decisions include assessing factors whether to use debt, equity, or a mix of both. In the end, it is the job of corporate finance professionals to optimize the company’s capital structure by reducing its weighted average cost of capital (WACC).
Dividend principle –
In this the key question is whether to streamline surplus towards business or distribute the dividends amongst the shareholders. Retained earnings that are not given back to the shareholders can be used to fund a business’s expansion and are one of the best sources of funds as it does not lead to accumulation of debts nor does it lead to a dilution of equity by the issuance of more shares. Similarly, another key decision could be to distribute dividends so as to create wealth for the shareholders thereby leading to better brand equity.
Types of Corporate Finance
There are a number of types of corporate finance for growing businesses. Some might prefer bank overdrafts, fixed term loans or others might prefer trade finance, leasing, venture capital, partners, etc. These are majorly defined in two types of corporate finance:
Short-term corporate finance:
These are the tools used when a business requires funds for a short period of time, say less than a year. These are commonly one-time loans and are beneficial when one is not able to get loans for a long tenure. Some of the examples of short-term corporate finance are:
-Bank Overdrafts
-Trade Credits
-Accrual Accounts
-Financial Lease
-Operating Lease
-Hire Purchase
Long-term corporate finance:
These are the loans that one repays over a period of one year or much longer than that, generally month-to-month installments. The benefit is that one gets the loan at minimum rates as well as minimum monthly payments as it spread out over the years. Some of the common long-term corporate finances are:
-Bank Loans
-Merchant Loans
-Debentures
-Equity Issuance
-Floatation
-Stock Dilution
Magistral’s services on Corporate Finance
Some of the services that are associated with corporate finance that are offered by us are as follows:
-Fund Strategy: Finding growth potential, investment activity, investment sizes, and macro-economic factors for a specific industry, geography, or an investment philosophy
-Investor profiling: Finding out the set of right investors for your fund or other investing opportunity and profiling it for further actionable details
-Investor communication: Periodic update of MIS, reports, fund-performance, valuation metrics, fund-raising progress, and others for Boards and Investors (LPs and GPs).
-Content marketing: Creation of well-researched Thought Papers, PoVs, Case Studies, Market Reports, Industry Reports, Company, and News analyses.
-Modeling and valuations: LBO and DCF Modelling, Precedent Transaction Analysis, Merger modeling, Sum of Parts Analysis, Sensitivity Analysis, Equity Analysis, Comparable analysis
-Real estate financing models: Rent Vs. Sell Analysis, Rent Vs. Buy Analysis, Rent Roll Analysis, Property Price Trends, Sell Vs Construct and Sell Analysis
Typical outcomes of our financial modeling services are –
– Independent and insight-based asset valuations
-Reduction in operations costs
-Leverage to negotiate a better valuation
-Exhaustive analysis to get other co-investors for an asset
About Magistral Consulting
Magistral Consulting has helped multiple funds and companies in outsourcing operations activities. It has service offerings for Private Equity, Venture Capital, Family Offices, Investment Banks, Asset Managers, Hedge Funds, Financial Consultants, Real Estate, REITs, RE funds, Corporates and Portfolio companies. Its functional expertise is around Deal origination, Deal Execution, Due Diligence, Financial Modelling, Portfolio Management and Equity Research.
For setting up an appointment with a Magistral representative visit www.magistralconsulting.com/contact
About the Author
The article is Authored by Marketing Department of Magistral Consulting. For any business inquiries, you could reach out to prabhash.choudhary@magistralconsulting.com