Corporate finance is the process of matching capital needs to the operations of a business.
It differs from accounting, which is the process of historical recording of business activities from a monetary point of view.
Captial is the money invested in a company to bring it into existence, grow and sustain it. This differs from working capital which is the money needed to support and maintain trade – the purchase of raw materials; Inventory financing Financing the required credit between production and realization of profits from sales.
Corporate financing can start with the smallest round of family and friends money that is put into a startup to finance its first steps in the business world. At the other end of the spectrum, there are multiple layers of corporate debt within huge international corporations.
Corporate finance mainly revolves around two types of capital: equity and debt. Equity is the shareholder’s investment in an equity-carrying business. Equity tends to stay within the company for the long term, in hopes of making a return on investment. This can either come through dividends, which are payments, usually on an annual basis, related to an individual’s percentage of stock ownership.
Dividend shares tend to accrue only to large, well-established companies that already hold enough capital to more than adequately fund their plans.
Smaller, higher-growing, less profitable operations tend to be voracious consumers of all the capital they have access to, and so tend not to create surpluses out of which to pay dividends.
In the case of emerging and growing companies, stocks are often sought after constantly.
In very small companies, the main sources of investment are often people. After the already mentioned family and friends, high net worth individuals and experienced sector personalities often invest in promising young companies. This is the pre-start-up and establishment stages.
In the next phase, when there is at least some sense of a coherent business, the main investors tend to be venture capital funds, which specialize in taking the most promising early-stage companies with rapid growth into a hopefully highly profitable sale, or flotation. public to participate.
The other major category of investment comes from corporate debt financing. Many companies seek to avoid diluting their ownership through ongoing equity offerings and decide that they can create a higher rate of return from loans to their companies than the cost of these loans to service via interest payments. The process of leveraging the equity and commercial aspects of a business via debt is generally referred to as leverage.
While the risk of increasing equity is that the original creators may become so weak that they end up getting precious little return for their efforts and success, the main risk for debt is corporate risk – the company must be careful not to be swamped and thus unable to pay its debts .
Corporate finance is the ultimate juggling business. It must successfully balance ownership aspirations, potential, risks and returns, taking into account optimally the suitability of the interests of both internal and external shareholders.