Definition of corporate finance

Corporate finance is the process of matching capital needs with the operations of a business.

It differs from accounting, which is the process of historical recording of a company’s activities from a monetized point of view.

Capital is money invested in a business to create, grow, and maintain it. This differs from working capital, which is money to prop up and sustain trade: the purchase of raw materials; financing of shares; financing the necessary credit between production and the realization of sales profits.

Corporate finance can start with the smallest round of money from family and friends invested in a fledgling company to finance its first steps in the business world. At the other end of the spectrum are the multiple layers of corporate debt within vast international corporations.

Corporate finance essentially revolves around two types of capital: stocks and debt. Equity is the investment of shareholders in a company that carries property rights. Equity tends to settle within a company over the long term, in the hope of generating a return on investment. This can come from dividends, which are payments, usually annually, related to the percentage of equity participation.

Dividends only tend to increase within very large, long-established corporations that already have enough capital to fund their plans more than adequately.

Younger, growing and less profitable operations tend to be voracious consumers of all the capital they can access and therefore do not tend to generate surpluses from which dividends can be paid.

In the case of younger and growing companies, equity is often continually sought.

In very young companies, the main sources of investment are usually individuals. After the aforementioned family and friends, high-net-worth individuals and seasoned industry figures often invest in promising young companies. These are the pre-start-up and planting phases.

In the next stage, when there is at least some sense of a cohesive business, the main investors tend to be venture capital funds, specializing in taking promising early-stage companies through rapid growth to a lucky sale. highly profitable, or a public offering from Share.

The other main category of investment related to corporate finance comes from debt. Many companies seek to avoid diluting their property through ongoing stock offerings and decide that they can generate a higher rate of return on loans to their companies than the cost of servicing these loans by paying interest. This process of preparing the equity and trading aspects of a business through debt is generally known as leverage.

While the risk of raising equity capital is that the original creators may become so diluted that they ultimately make very little profit for their efforts and success, the main risk of debt is business – the company must be careful not to go under. and therefore, unable to pay its debts.

Corporate finance is ultimately a juggling act. You must successfully balance ownership aspirations, potential, risk and returns, optimally considering an adaptation of the interests of internal and external shareholders.