What is corporate finance? This is a very complicated area of financial business that has many different strands that must be studied in order to understand the dynamics of corporate finance. It is an ever-changing area as it considers all of the major factors that can impact how companies use their funds such as market fluctuations, government policies, and even how the stock market fluctuates. All of these things can have direct or indirect effects on the funds available to a company and therefore it is essential to have someone who knows the ins and outs of this area of study to help guide companies through this stormy period.
Financial Manager Roles
Understanding what corporate finance is requires a detailed look at the role of venture capital firms in the overall venture capital picture. Venture capitalists are those people, other than general public shareholders, who put up the money for a firm in the hopes that it will generate enough earnings to pay back the money by some specified time period. The most common types of venture capital funds available to companies include angel investors, M&A capital firms, venture capital firms, and venture capital organizations. Typically, venture capital firms will not provide start up capital as it relates to providing startup capital to new businesses, but they do provide ongoing funds that are used primarily to buy out other firms. A company’s stock price is generally tied to its equity, therefore, when a firm purchases a controlling interest in a firm it is typically reducing the equity in the firm.
One way for businesses to obtain funds in the form of equity investment would be through equity offerings to accredited investors. For a company to qualify as an accredited investor, it must meet a number of requirements related to capitalization and liquidity. The most important requirement for an accredited investor in a corporate finance transaction is that the business must have sufficient working capital, which is defined as the current balance of the company’s outstanding credit card debt plus the current cash balance held by the accredited investor and net cash flow through the last six months.
Another way for a company to raise capital is through venture capital. Venture capital firms are intermediaries between early stage venture capitalists and start up corporations. In the case of venture capital investment, a firm will usually act as the negotiator with respect to potential start up debt issues with a given company. When a firm invests in another firm, it is normally creating a dual-power arrangement where the new firm receives a start up credit facility from the existing firm, in turn using that credit facility to make further investments in other companies.
Investment banking also plays a significant role in corporate finance. Investment banks play a significant role as it relates to establishing and monitoring a company’s capital budgeting. These banks review investment projects and loan them to companies according to their financial plans and requirements. Most significantly, investment banking firms determine the level of financing that a company requires as it relates to fulfilling its obligations. Additionally, investment banks can provide other credit facilities to a company, including commercial loans, commercial mortgage, etc.
One of the largest roles that banks play in corporate finance decisions is through credit risk management. Credit risk management involves assessing the creditworthiness of a firm. If a firm is not creditworthy, it will not be able to obtain funds to invest in certain projects or if it obtains the funds, it will have too large of a payment to make when making those investments. The biggest problem with credit risk is that if a company is determined to be credit worthy, but the bank itself is too scared to lend it money, then the company will not be able to realize its capital investments and therefore will fail. Thus, proper management of credit risk is extremely important.
A third role of banks in corporate finance is through capital structure decision making. Capital structure decisions typically involve determining what type of financing a firm will need for its projects. Typically, banks require a company to plan for long-term debt payments, as well as short-term debt payments. Aside from determining the capital structure, banks also determine the use of those funds, such as through the purchase of short-term assets, repurchase of long-term assets, etc.
Finally, the role of a financial manager is to ensure that all of these plans go as intended. A financial manager is typically accountable for the finances of a firm. In general, a financial manager is a senior banker. He/she oversees all financial activities of a firm and, therefore, plays a key role in the management of firms. A good financial manager should be experienced in corporate finance and business banking, as well as familiarity with various models of capital markets, such as derivatives and capital markets infrastructure.