If there is something that worries anyone who has a company, it is having healthy finances that allow their business to continue growing. That is, create value. Well, did you know that there is a name to refer to that concept? That’s right, getting more profits for your company is known as corporate finance. Do you want to discover what they consist of, what they do to achieve it and their main areas? Well, all you have to do is keep reading because then, we will tell you all that and much more. To the mess!
?Corporate finance, what is it?
To help us explain what corporate finance consists of, nothing better than starting with Wikipedia’s definition of this concept:
Corporate finance is an area of business administration that focuses on the monetary decisions that companies make, as well as the tools and analysis used to make those decisions.
Or put another way, Corporate finance is a branch of a company that is dedicated to creating, maintaining and increasing financial resources in a sustainable and efficient manner. Come on, they make sure you earn more money (which, in the end, is what matters, right? 😉 ).
?Concepts associated with corporate finance
To better understand what this idea consists of, it is worth know other related concepts to her:
Opportunity cost: There will always be opportunities to invest, so you should choose only those that return more benefits in less time.Liquidity: You have to find the balance between investing and keeping “liquid” money to pay for the expenses that arise.Diversify: what has been “do not put all your eggs in the same basket”. Investing in different fields minimizes the risks of loss.Risk and benefit: Every investment carries risk, but without it it is almost impossible to make a profit.Financing: or rather types of it, because there are no 2 investments that are financed in the same way. Each one has different needs.Leverage: a way to obtain debt benefits whether you are the debtor or the creditor (we talk about this concept in this post).
All of them are related to corporate finance.
?The functions of corporate finance
As we say, this functional area of your company has as its main objective make economic decisions that increase the value of your business. And to achieve this, it fulfills the following functions.
There is a saying that “what is not measured cannot be improved”, and we couldn’t agree more. Because, how can you know if this year you have earned more than the previous one if you do not keep a record? Or what is your profit margin if you don’t know how much it costs you to make your products? That’s why One of the main functions of corporate finance is to report at all times on the financial status of the company. All this through reports, reports and analysis that allow you to access this type of information at a glance to better understand what to do to improve.
The second task of those responsible for corporate finance is decide what to do for the company to increase its profits. To do this, all the information collected in the previous point is analyzed, all the possibilities are studied and it is decided:
In what to invest. The moment to do it. How the investments will be obtained. What will be the sources to finance themselves. The creation or not of a capital budget. The most convenient operating policies.
To help in decision making, there are different tools:
Horizontal and vertical analysis.Ratio analysis.Financial ratios.Etc.
Thanks to them, it is easier to choose the right option that guarantees more profits.
Once the financial state of the business is known and it has been decided what to do to improve it, what is left to do? Right, get on it. The last of the functions It consists of making the stipulated plan a reality., putting to work whoever is needed to obtain the expected results and achieve the set objectives. Many people get dizzy at this point, but if the previous steps were done correctly, you don’t have to worry. That’s why it’s important that you give them enough time (but never stop you from moving forward!).
?The 3 main areas of corporate finance
When we talk about areas in corporate finance, we refer to concepts that a specialist in this field must control. As you can imagine, being related to an aspect as relevant to any business as the economy is, it is a very extensive topic. That’s why, we will focus on the 3 most important that ensure better growth.
✅ increase capital
every business has the obligation to invest in oneself to grow (although you can also go online to do it). For example, a factory has to buy new machinery that increases the quality of its products or allows it to create more in less time, or a business must invest in training its employees and thus retain talent. But of course, if you have the capital, the “only” thing you have to do is worry about investing it correctly, but what if you don’t? That is where the corporate finance area comes in and what we have seen so far. It will be necessary to study the situation of your business, decide what actions to take to obtain more capital and start the process.
✅ working capital
Working capital is known as all the money that is used on a day-to-day basis within a company, such as:
As you can see, in some cases it is about the so-called “small expenses” and although in quantity it may be so, in importance they are not small at all. In fact, it is vital that you keep track of these payments to check that you spend only what is really necessary, or even to plan investments and be able to save for them. Payments to suppliers are also taken into account at this point, so it would be a good idea to take a look at our post on the supply chain.
✅ capital budget
The capital budget is perhaps the most abstract concept of all, because what he seeks is to know what the company will need in the future. It is easy to confuse it with the “increase capital” part, but there is a difference that, although small, is enough to understand that they are not the same. And it is that in the capital budget, we try to find out the possible needs that will be created after a time while in the other, they are known with certainty. In short, it is a kind of theoretical exercise that seeks to have their backs covered in the face of uncertain spending.
?How do you manage your corporate finances?
For our part, everything we wanted to tell you about corporate finance ends here, but that doesn’t mean you can leave… What do you think if you tell us how you do it in your business? Think that your experience can help other people (and a little karma never hurts). And if you have questions or want to tell us anything else about this topic, you can also do so. Being honest with you, all we want is for you not to leave without commenting. 😉