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When investing, understanding corporate finance will help you evaluate the current status and future potential of a business. Thereby, investors can make the most informed decisions. So what is corporate finance? What role does it play? Let’s find out in the article below!
What is corporate finance?
Corporate finance is used to describe activities related to a company’s financial management system. This activity will be associated with controlling the business’s cash flow appropriately and generating profits. People working in this field will have to read and analyze financial reports, profits or losses of businesses. From there, build a suitable balance sheet.
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When financial reports indicate problematic business operations and a lack of capital, the business financial manager needs to adjust and change policies to overcome it. People working in the finance industry often rely on financial reports to find ways for businesses to overcome difficulties. This is resolved by finding answers to the questions below:
- How much money does the business need to invest?
- Where and how will the money the business currently needs be mobilized?
- What will the money be used for after being mobilized?
- How will the money collected from further production and business activities be used?
What is the role of corporate finance?
Create capital, attract financial resources
Corporate finance ensures sufficient and stable capital for business activities to meet production and business activities in a timely manner. The function of corporate finance is to exploit and attract financial resources with appropriate methods and forms of capital mobilization. This is to help production and business activities run smoothly with the lowest capital costs.
Appropriate income distribution
Corporate finance is responsible for balancing capital appropriately, using money most effectively and economically, thereby promoting business and production activities of the enterprise. Using capital economically means not leaving capital idle or being used in vain. Using cash flow effectively is prioritizing the use of capital for investment items or projects that are profitable, safe, and have early capital recovery.
Supervise and check the capital circulation process
The corporate finance department can make appropriate suggestions related to improving efficiency when controlling capital for company executives and managers. Thus, corporate finance acts as a tool to check, monitor as well as analyze and evaluate the operating situation of a business.
Principles of corporate finance
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There are many principles of corporate finance, depending on the business industry, state policy, type of business, etc. However, there are basically some principles of corporate finance as follows:
- Corporate finance activities are always associated with and serve the production and business activities of the enterprise.
- All financial activities from capital mobilization to capital use must have specific plans, including short-term, medium-term and long-term plans. These activities need to ensure respect for the law from project formulation to implementation.
- Business financial institutions need to operate effectively so that all activities within the business are positive. This process will affect the revenue and expenditure of the business.
- Corporate financial activities always need to balance risk and profit margin. Businesses can apply diversification in investment fields or product portfolio
Jobs in the corporate finance industry
Depending on each job position you hold or the business field of the business, the nature of each financial department at that business will change. In general, the work of the corporate finance industry includes the following tasks:
- Carry out tasks related to establishing and appraising financial sources for businesses in investment projects.
- Evaluate and select appropriate capital mobilization and profit distribution options for the business.
- Provide analysis and assessment of the financial situation of the business at the present time. From there, we can promptly detect business problems and propose improvement plans.
- Implement financial planning and build a financial resource management mechanism for businesses.
- Identify risks and factors that can affect the financial activities of the business. Thereby establishing an effective risk management and cash flow system.
Hopefully through the above article, you have understood what corporate finance is as well as its principles. Corporate finance plays an important role in mobilizing and using capital appropriately. In addition, corporate finance needs to have certain principles and ensure effective, planned operations and compliance with the law.