Corporate Finance Overview

 

Corporate finance is the specific area of finance dealing with the financial decisions corporations make, and the tools and analysis used to make the decisions.  Finance makes sure the company has the money it needs in order to operate.  They are able to show external and internal parties financial data through financial statements, prepared by accountants, which are used to make decisions about the firm’s financial condition, and to advise others about possible losses and profits.  Finance analyzes the health and growth of a company, manages the company’s cash, and deals with banks.  Most mid to large size companies will have a CFO (Chief Financial Officer) who oversees the finance department, which normally consists of a controller, managerial accountant and/or general ledger accountant. 

 

Finance is also involved with leasing property, equipment, purchasing raw materials, and pays employees.  They provide helpful information in monitoring and evaluating management performance such as helping departments prepare their budgets and consolidate it into one company budget.  They work with the Senior Management team (the CFO is part of this team) to set the company’s sales and profit goals for the year.  Senior Managers use accounting information in making investment decisions, investors use accounting information to value stock, and bankers rely on accounting information in determining any potential risks to lend money.

 

Besides what has been previously stated, some more detailed responsibilities of corporate finance are:

• Cash flow budgeting and working capital management, which is managing the relationship between a firm's short-term assets and its short-term liabilities.  The goal of working capital management is to ensure that the firm is able to continue its operations, and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses.  Working capital is: “current assets minus current liabilities.”  Working capital measures how much in liquid assets a company has available to build its business. 
• Comparing alternative proposals.
• Forecasting and risk analysis.
• Raise and manage its capital:  Obtaining funds, debt or equity sources, long-term or short-term, and optimum capital structure.
• Allocations of funds to long-term capital investments vs. optimize short-term cash flow.
• Dividend policy.
• The risk-return framework and the identification of the asset appropriate discount rate.
• Valuation of assets.  Discounting of relevant cash flows, relative valuation, and contingent claim valuation.
• The optimum allocation of funds.  What to invest in?  How much to invest? When to invest?
• How much money will be needed at various points in the future? How will it be funded?
• Identification of required expenditure of a public sector entity.
• Source of that entity's revenue.

 

We will not be able to go over each of the items just described, as you would need to take a full time financial course to fully understand it all.  However, we will go over and discuss the items you might encounter whenever dealing with finance or upper management.  We will present an overview of financial accounting and managerial accounting.  We will discuss and have examples of two financial statements, the balance sheet and income statement.  We will also discuss the cash flow statement.  We’ll cover terms like Assets, Liabilities, Equity, COGS, SG&A, EBIT, EBITDA, Margins, ROI, FIFO, LIFO and Capex.  And, we will demonstrate some of the most common financial analysis ratios, present a basic overview of inventory accounting, go over basic accountant responsibilities, and finally ending up with how to set up a budget. 

 

As a manager, you should understand the basic financial statements and the associated terms in order to know how your budgets, transactions, and decisions affect the company.