Corporate finance management

WHAT IS FINANCE?

Finance is study of the valuation and management of risk. There are two components to risk.

NATURE OF CORPORATE FINANCE

Corporate finance is the broad heading given to the process of transacting and managing certain activities of companies, including the raising of funds and the realization of value through a sale or listing. These include raising funds for the purpose of financing existing activities developing new activities or investing in new fixed assets, buying other companies or businesses and selling the whole or part of companies, or even selling certain specific assets . At its most basic level it could be arranging a simple loan for the purchase of a piece of machinery, or agreeing an overdraft facility to meet cash needs during a seasonal slow down. Alternatively, it could be a hugely complex deal involving the issue of complex instruments to financial institutions and the public .

There are numerous methods by which any of the above activities can be financed and structured by any of the parties to a transaction, but ultimately whatever means is adopted will be classified as either debt or equity. Debt will eventually have to be repaid and will almost certainly have to be serviced until then, whereas equity is effectively permanent capital. Activities where equity is the primary consideration include the listing of shares on stock markets, introduction of venture capital or private equity into a business and funding management buy-outs and buy-ins . In merger and acquisition activities both equity and debt are likely to feature prominently . Debt focused transactions include overdrafts and term loans, leasing, factoring, guarantees, asset and trade finance, and bond issues.

Providers of capital, whether debt or equity, will expect to make a return on the funds provided, with the level of return expected linked to the perceived risk attached to either the entity receiving the funds or the project for which the funds are earmarked .

The providers of finance can be shareholders in the business, both pre-existing and those who become shareholders as a result of the transaction, and the funds thus provided are classified as equity . If the provider of funds does not become a shareholder in the business the funds can be classified as debt, although in certain circumstances debt may take on the characteristics of equity .

Despite the wide range of funding options available to businesses or perhaps because of it decisions on which form of finance to introduce, or structure to adopt, are often reactively in response to short-term needs or what is on offer from bankers or other institutions currently supporting the company, and not in relation to a longer term strategy for growing shareholder value . This is a crucially important issue to consider as in any free market economy enhancement of shareholder value has to be the primary objective of business activity, even if there will also be other important goals . Therefore, at the very least, any decision must at least preserve current shareholder value and ideally should enhance it over time. Sadly, it is often the case that shareholder value is actually eroded as a consequence of having made the wrong or not completely appropriate decision Clearly, it is not possible to ensure that no decision will ever turn out to be inappropriate, but it should be possible to minimize risk and maximize the chances of success, barring totally unforeseen circumstances .

Corporate finance practitioners, including bankers, accountants, lawyers and other professionals, whether working in-house or within external advisory organizations, should be able to assist in the planning and execution of transactions . Although in many cases advisers merely execute transactions in tried and tested ways, sometimes they create innovative new ways of structuring things.