Overview
Whether you are a small business unit or a giant corporation, every business owner knows that managing a business is not easy. Every business entity wishes to keep its costs minimal to achieve maximum growth. But, on the other hand, businesses also need a constant inflow of funds for running as well as growing it. This is true for all businesses, big or small. There are multiple ways a business ensures a constant supply of finance for its day to day operations. The same has been discussed in our blogs earlier as well.
Businesses going through financial constraints need to do budgeting, optimum utilization of limited funds, borrowing capital, business investment decisions, etc., and more. Therefore, ensuring adequate financial resources could be a dreadful task. Even when you have a surplus you cannot let your money sit idle. This is where the concept of corporate finance comes into the picture. Read further to learn everything about corporate finance.
Corporate Finance – Meaning and Purpose
Corporate finance is a sub-area of finance which deals with matters such as the capital structure, sources of funding, and borrowing decisions of a business entity to be made with a view to increase the business value. The ulterior objective of corporate finance is to enhance business value through effective planning business assessment through better planning and allocation of resources with the right proportion of risk and profitability.
Business decisions such as the issue of shares and debentures, borrowing either short-term or long-term borrowing, and revenue generation such as joint ventures or strategic alliances, etc. are financial measures for prioritizing and allocation of financial resources. Therefore, corporate finance plays a vital role in the overall management decisions and strategies for a corporation.
Corporate Finance for Small Business
Need for Corporate Finance
- Better decision making: Businesses use corporate finance to analyze financial data to find out the risk-taking ability of the business, make projections and predict outcomes, identify options for investment, and determine the risk-return ratio.
- Allocation for effective utilization of finances: Corporate finance allows businesses to do financial planning and funds allocation to achieve maximum growth.
- Funds for growth and expansion: Businesses use certain financial tools and techniques to find the right growth opportunities and make financial strategies for growth. Further, management decisions such as budget structuring, utilizing investments for growth or borrowing could also be made.
- Creates financial forecasts: Irrespective of the business size, all businesses wish to make certain projections in advance to prevent any unexpected risks. Thus, with the use of corporate finance, businesses could make financial forecasts, estimate future cash flows and enhance overall business performance.
- Risk Factor Identification: Though no business is immune to potential risks, businesses could identify potential risks, market volatility, recession, or liquidity crisis and take appropriate measures to avoid any irregularities or concerns.
Types of Financing
- Equity Finance: Under this method, a business entity sells its ownership in order to raise funds for the business which could either be in the form of stakes or shares.
- Debt Financing: It involves borrowing from lending institutions like banks/NBFCs or from investors. Later, the loan is repaid along with the principal and interest. The benefit of this kind of funding is that the business does not lose control or ownership of the business.
- Repayment of Loans: Maintaining a banking compliance calendar for all loan related transactions, the preparation and submission of related documents and adhering to the interest payment timelines. All these can become a very demanding task and an expert from corporate finance will be well equipped to handle such tasks on a daily basis for the SME or any other business.
- Mezzanine Finance: It is a hybrid financing method that contains the elements of both debt as well as equity. It involves the issue of instruments that are higher in rank than equity but lower than ordinary debt.
- Venture Capital Finance: It involves the receipt of funding to a business through VC firms for a certain percentage of ownership in the business. The funds can be directed from friends and family, NBFCs, Angel Investors or Banks.
- Private Equity Financing: In this type of financing, private equity firms obtain a certain ownership in a business in return for funds.
- Initial Public Offering (IPO): When a privately owned company issues its shares for the first time, to the general public to raise funds for the business in exchange for certain ownership in the business, it is known as an IPO. Once an IPO is issued the shares of the company get listed in the stock exchange and can be traded freely.
- Convertible Debt: In this type of financing, initially funds are provided in the form of debt and upon meeting certain conditions it can be converted into ownership in the business through equity. This is beneficial for both the company and the investor.
Key Focus Areas of Corporate Finance
Capital Investments –
This includes the identification of expenses, estimation of future cash flows, and comparison of projections with actual proceeds. Failure to undertake capital budgeting carefully could in turn lead to the poor financial position of an entity. This may leave loopholes that can ruin the lending capacity and goodwill of the business in question, in turn reducing the overall credit ratings for the company.
Capital Financing –
It involves sourcing capital either in the form of equity or debt or both from various sources. It encompasses business decisions regarding the right balance between debt to equity to know whether the business has adequate capital to grow and expand its operations. The choice can be strategic where the owner wants to give up part ownership and control or just work with debt finance.
Capital Management –
This involves current business operations undertaken with adequate liquidity through effective management of current assets, liabilities, working capital, and cash flows in order to fulfill the short-term and long-term obligations of a business.
Conclusion
Therefore, the knowledge and utilization of corporate finance are of utmost importance to ensure success for a business organization. The analysis of financial data, creating financial plans and budgeting, and making crucial business decisions will help an organization achieve its short-term as well as long-term goals. to effectively manage your banking needs book a free demo with BankKeeping today.
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