Everyone uses finance at some point in their lives when they need capital supplied by another. Often, this term is used for the study of economics and how money is controlled. A more general and accepted definition is the control of business plus public sector assets and money. This of course requires the use of specialist trained in money matters often referred to as finance managers.
These managers arrange funds to be lent to individuals or business using their company's assets where possible and if not sourcing the money elsewhere. The whole basis of optimization is to enable the maximum return from your finance whilst ensuring the cost to arrange it stays at a minimum.
The lives of almost everyone on this planet revolve around finance and when poor management occurs, the effects are seen globally with reductions in production and sales which obviously feed world markets. For this reason, a finance manager is expected to be very judicious in either the use of available funds or allocation for expenses.
A well know marketing and management guru Lee Iacocca said that finance managers always looked at the cost involved in a finance deal and not the future return. These managers are the opposite of sales managers who are forward, investment thinking individuals; whereas a finance manager will not recognize the fact that investment requires an approach that lies in seeing into the future to look for returns. Some problems arise for the number of businesses that arrange loans and then use them for personal reasons, forgetting that this clearly defined barrier exists. Managers are rarely impressed with this situation as they believe they have aright to know what their money is being used for.
By stopping business borrowing this way it is hoped they will start to see the importance of maintaining good practices which should help with investment later on. However, small businesses can finance their needs from other sources like friends or from banks and private lenders.
Lenders prefer to use money from elsewhere because it lowers their risk but still allows for a healthy profit to be received by the finance company. Banks have always been known as institutions that prefer to lend money to those that least need it which is why if you are already wealthy and require a loan it is often arranged at a preferential rate of interest.
The field of corporate finance deals with the decisions of finance taken by corporations along with the analysis and the tools required for taking such decisions. The principle aim of corporate finance is enhancing the corporate value and at the same time reducing the financial risks of the company. In addition to this, corporate finance also deals in getting the maximum returns on the invested capital of the company. The major concepts of corporate finance are applied to the problems of finance encountered by all type of firms.
The discipline of corporate finance can be split into the short term and the long term techniques of decisions. The investments of capital are the long term decisions relating to the projects and the methods required to finance them. On the other hand, the capital management for working is considered as a short term decision that deals with the short term current liabilities and asset balance. The main focus here rests on the management of inventories, cash and, the lending and borrowing on a short term basis.
Corporate finance is also associated with the field of investment banking. Here, the role of the investment banker is the evaluation of the various projects coming to the bank and making proper investment decisions regarding them.
The Capital Structure:
A proper finance structure is required for achieving the set goals of corporate finance. The management has to therefore design a proper structure that has an optimal mix of the different finance options that are available.
Generally, the sources of finance will comprise of a mix of equity as well as debt. If a project is financed through debt, it results in causing a liability to the concerned company. Hence in such cases, the flow of cash has various implications regardless of the success of the project. The financing done by equity carries a lower risk regarding the commitments of the flow of cash, but the result of this is the dilution of the earnings and the ownership. The cost involved in equity finance is also higher in the case of debt finance. Hence, it is understood that the finance done through equity, offsets the reduction in the risk of cash flow. The management has to hence have a mix of both the options.
The Decisions of Capital Investments:
The decisions of capital investments are the long term decisions of corporate finance that are related to the capital structure and the fixed assets. These decisions are based of several criteria that are inter-related. The management of corporate finance attempts to maximize the firm's value by making investments in the projects that have a positive yield. The finance options for such projects have to be done in a proper manner.
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