Functions of Corporate Finance

Corporate finance utilizes tools and analysis to make sound financial business decisions.


Learning Objective

  • Describe the role of finance in corporation


Key Points

  • The finance group is in charge of budgeting. It will look for the optimal allocation of assets across all business functions.
  • Corporate finance decides how best to finance projects. The department can either use existing internal funds, borrow money, or sell equity.
  • The finance group must balance both short- and long-term company goals, though the overarching goal is to maximize shareholder value.


Terms

  • investment

    A placement of capital in expectation of deriving income or profit from its use.

  • finance

    To provide or obtain funding for a transaction or undertaking; to back; to support.


Corporate finance deals with monetary decisions that business enterprises make and the tools and analysis utilized to make the decisions. Corporate finance is concerned primarily with making investment and financing decisions; that is, making sure that money is being used in the best way.

The corporate finance department of a company is in charge of budgeting. Management must allocate limited resources between competing opportunities; since a dollar cannot be used for more than one project at once, it is a challenge to determine how much money should be allocated to each part of the business.

In determining how to allocate money, the finance group must also figure out where the money will be best utilized. This requires valuing projects and business functions. A large element of finance is deciding how exactly to value a project. There are a number of variables - inflation, expected revenues, expected costs, length of time required - that are all incorporated into the valuation process. Finding the true value of a project is often wrought with uncertainty, but without an accurate valuation, a company may allocate its resources sub-optimally.

The corporate finance department must also determine how to finance projects. A company can finance a project by using either internal funds (money the company already has), borrowing, or selling equity. Each option carries a certain cost that can be quantified. It is the job of the finance department to make sure that the overall cost isn't too high and that the company has an optimal mix of all three strategies.

One public job function of corporate finance is determining whether or not the company pays a dividend, and if so, how much. The company has a responsibility to maximize shareholder value, but that can be achieved in multiple ways. Paying a dividend puts cash directly in the hands of shareholders, increasing shareholder value. However, paying a dividend means that money is not being reinvested in the company. If a company doesn't pay a dividend and instead chooses to reinvest the money, the value of the company will presumably increase, in turn increasing shareholder value. The finance department determines which option maximizes shareholder value.

Lastly, the finance department must also ensure that there is a good balance between long- and short-term goals. The company must have enough assets to cover short-term costs, referred to as working capital management, and enough invested to ensure the company has long-term growth.