Keys to corporate finance principles and corporate finance management
Corporate finance introduction
Whether you are founding a corporation, or it’s time to update and address faulty financial policies, developing a clear system for corporate finances is integral to the success of your business.
In short, corporate finance focuses on business capital, cash flow, and budgeting.
Corporate financing includes topics such as:
- Funding sources
- Capital structuring
- Borrowing and investing decisions
- Corporate compliance
Through effective corporate finance, we optimize financial outcomes, increase the value of the business, and grow overall profitability.
Since almost all decisions made about a company will affect the bottom line, corporate finance is an important component of decision-making that can make or break the financial health of a company.
In this way, we can consider corporate finance decisions to be a cycle of actions aimed to increase available funds, then spend funds in such a way to increase available funds.
What is corporate finance management?
Investment decisions, capital structure, and funding don’t manage themselves!
By applying financial principles for sustainable success, and effective resource allocation, executives can efficiently implement corporate finance management.
Through effective financial management, a business either maintains or increases value. Conversely, without thorough finance management, a business likely loses value through poor budget allocations or ineffective capital structuring.
Corporate finance management involves both short-term and long-term financial planning. What makes sense now to increase revenue and profitability could be damaging to the future of the business finances. In contrast, what is most sensible and profitable for the long-term financial integrity of the corporation could be impossible to achieve based on short-term funding availability or financial projections.
It can be helpful to work with a team of established, experienced financial consultants to create a roadmap to corporate finance plans and policies that ensure the short and long-term success of your corporation.
Corporate finance basics
At the center of corporate finance is maximizing the value of the corporation and minimizing risk and liability.
This is most often achieved by expanding profit and lowering operational costs.
By implementing smarter financial decisions, a corporation drives up value for shareholders and decreases debts taken on by the company.
A clear, effective corporate finance policy boils down to keeping accounting in the green, not the red.
Corporate finance principles
When it comes to organizing a company finance plan, try to stick to these corporate finance principles.
- Investment – Investments should have a greater rate of return than the cost of establishing the investment itself.
- Financing – Financing refers to determining funding sources for corporations. Clear financing is a way to ensure that the value of investments is maximized.
- Dividend principles – This is a best practice in corporate financial planning. Profits from principals, or returns, shall be used to return principal to shareholders.
By including these principles in your company finance policy, you establish corporate financials in a good way.
Concepts of Corporate Finance
Here is a quick review of some common corporate concepts and their definitions. Your executive team, especially the CFO, should keep these concepts in mind as you develop or redevelop your corporate finance strategy.
- Arbitrage – This is an investing strategy that implies some risk, but if implemented properly, your corporation can gain rather than lose. Arbitrage is buying an asset in one market at a certain price, then selling it for more, in a different market.
- Net present value – The concept of net present value is to help a corporation stay on track with budgeting. CFOs can calculate the ROI of certain ventures before spending capital elsewhere. Net present value has to do with presently available cash flow.
- Market efficiency – This concept helps to illustrate the actual cost of an asset on the market. If the market is efficient, the price reflects all relevant factors that contribute to the true value and the price is not overvalued or undervalued.
- Agency theory – This theory in the corporate financing industry describes the relationship between the principal and agent. One example of this is the shareholders and the company and its executives shareholders invest with. Shareholders represent the principal. A corporation and its execs represent the agency.
- Options – The concept of options allows shareholders, investors, or other figures that represent the principal the right to choose to buy or sell an asset. This typically involves a fixed price, usually based on the present market value.
- The trade-off between risk and return – Perhaps the most straightforward concept in corporate finance, trade-off, is an indication that the greater the risk of liability, the greater the possible reward. The more a corporation is willing to risk, the more value it stands to gain from the transaction. Of course, ideally, there is an emphasis on creating a balance between risk and reward, since most stakeholders don’t want to risk everything!
Corporations can implement these corporate finance concepts to increase the overall value of the business, and structure capital flows effectively so achievements are aligned with corporate goals and objectives.
The key to understanding corporate finance
Developing a corporate finance policy for your corporation requires knowing the principles of finance, investment, financing, and dividend principles and managing these capital systems accordingly.
Thanks to corporate finance concepts, executives can establish a corporate finance system that functions effectively for their particular needs and KPIs.
Ultimately, the goal of corporate finance is to employ best practices of finance to ensure that the cycle of value growth can play out. In this cycle of money, as the value of the business increases, so do the funds available to continue the process of increasing value.
If your corporation is updating corporate finance policies or establishing corporate finance policies for the first time and could benefit from the support of experienced corporate consulting professionals, the Hunter Stevens team can help.We can provide insight as to the best ways to allocate funds and grow the profitability of your business based on financial accountability through company finance management. Contact us to develop your corporate finance plan.