Corporate Finance

Corporate finance focuses on how corporations can use long- and short-term financial planning and other strategies to source funding, structure capital, make investments and employ accounting techniques to maximize shareholder value. It focuses both on day-to-day cash flow and on long-term planning.

Corporations have a wide range of ways to raise capital for growth. These include retained earnings (better known as profits), taking on debt, and selling off ownership (equity funding). Success lies in finding the correct mix of these methods—and companies can be valued by how they balance their funding sources.

Capital budgeting uses three methods to determine whether a possible capital investment makes sense. The payback period calculates how long it would take for the project to earn enough to recover its cost. The internal rate of return is how much the project should earn—and whether that’s higher than the borrowing cost. The net present value method lets you compare the proposed project to other options to see which project would make more.

A cash flow statement is a sort of corporate checkbook that reconciles a company’s balance sheet and income statement. It records the inflow and outflow of cash and lets investors know whether the revenues that a company has booked on its income statement have actually been received. Note that while a positive cash flow is good, the statement doesn’t account for liabilities and assets; it’s not a complete picture. Some companies with negative cash flows may still be good investments.

Both are important, but equity—the company’s assets minus liabilities—is a more accurate way to estimate what a company is worth. Market capitalization is the total worth of all a company’s outstanding shares; it can fluctuate daily, if not hourly, with the share price on the stock market.

Strategic financial management is how companies make money—and that is the ultimate report card for a manager. Skilled managers focus on long-term success (strategic management), though they may also use tactical management tools to position the company for the short term. Key elements include planning, budgeting, risk assessment and management, establishing ongoing procedures and strategies targeted to the industry/sector in which the company operates.