Corporate FinanceFinance » Corporate Finance
Corporate finance deals with various monetary aspects of a business organization. Every business organization needs finance for its efficient functioning, to increase its profits, to minimize the cost of production, to make decisions, for acquisition and investment, to ensure that there are sufficient funds etc. In short, finance is the life blood for all types businesses; profitable as well as non-profitable.
The importance of corporate finance can be classified as follows:
- Decision Making: There are several decisions that have to be done on the basis of available capital and limited resources. If an organization has to start a new project, then it has to consider whether it would be financially viable and if it would yield profits. So while investing in a new project or a new venture, a company has to consider several things like availability of finances, the time taken for its completion, etc. and then make decisions accordingly.
- Research and Development: In order to survive in a volatile market for a long duration, a business organization needs to continuously research the market and develop new products to appeal the consumers. It may even have to upgrade its old products to compete with new vendors in the market. Some companies employ people to conduct market surveys on a large scale; prepare questionnaire for consumers; do market analysis, while other may outsource this work to others. All these activities would require financial support.
- Fulfilling Long Term and Short Term Goals: Every organization has several long term goals in order to survive in the market. The short term goals may include paying the salaries of employees, managing the short term assets, acquiring corporate finances like bank drafts, trade credit from suppliers, purchase of raw materials for production etc. Some long term goals would include acquiring bank loans and paying them off; increasing the customer base for the company etc.
- Depreciation of Assets: When you invest in a new software or a new equipment, you would require to keep aside some amount to maintain it and upgrade it in the long run. Only then you could be assured that it would yield good results over a period of time. In the fast changing times of today, if this is not done, you might end up losing business if you do not have finances for it.
- Minimizing Cost of Production: Corporate finance helps in minimizing the cost of production. With the rising cost of prices of raw materials and labor, the management has to come up with innovative measures to minimize the cost of production. In many organizations that spend a lot of money on large scale production, deploy professionals for this purpose. These people tend to buy quality products from vendors who offer it at lowest possible rates. For example, a products based software company might buy software from a vendor that sells it at a lower rate than an internationally acclaimed company selling the same thing.
- Raising capital: When an organization has to invest in a new venture, it is very important that it has to raise capital. This cab be done by selling bonds and debentures, stocks of the company taking loans from the banks etc. All this can be done only by managing corporate finances in a proper manner.
- Optimum Utilization of Resources: The resources available to organizations may be limited. But if they are utilized efficiently, they can yield good results. For example, a business organization needs to know the amount of money it can spend on its employees and how much hike should be given to them. The proper management of corporate finance would also help in utilizing its profits in such a manner that would help in increasing them; for example, investing in government bonds, keeping up with the latest technology trends to increase efficiency.
- Efficient Functioning: A smooth flow of corporate finance would enable businesses to function in a proper manner. The salaries of employees would be paid on time, loans would be cleared in time, purchase raw materials can be done when required, sales and promotion for existing products and launch of new products, etc.
- Expansion and Diversification: Before an organization decides to expand or diversify in to a new arena, it has to consider various aspects like the capital available, risks involved, the amount to be invested for purchase of new equipment etc. All this can be done by experts and this would be very beneficial for the organization.
- Meeting Contingencies: Running a business involves talking several risks. Not all risks can be foreseen. Although you can transfer some of these risks to third parties by buying an insurance policy, you cannot have every contingency covered by your insurer. You would have to keep some amount aside to tide over these situations.
Corporate finance plays a very important role in the overall functioning, growth and development of a business. In India, finance advisors help entrepreneurs and businesses by providing them with vital information through market research and analysis. This helps then to make decisions, expand their business, and survive in a competitive market in the long run. Therefore, the management of corporate finance is very important for profitable as well as non-profitable organizations.