What is corporate finance (short definition)
Corporate finance is the area of finance that covers how companies get and use money to run and grow the business. It focuses on choosing which projects to invest in, deciding how to raise the needed funds (debt versus equity), and managing day‑to‑day cash flows so operations continue smoothly. The ultimate aim is to increase the value of the company for its owners over time.
Key terms (defined)
– Capital budgeting: the process of selecting and prioritizing long‑term investment projects (for example, new factories, equipment, or product lines).
– Capital financing: deciding how to fund investments and operations — commonly via debt (loans, bonds) or equity (selling shares).
– Working capital: short‑term resources used in day‑to‑day operations; commonly measured as current assets minus current liabilities.
– Liquidity: the ability to meet short‑term obligations when they come due.
– Net present value (NPV): the sum of present values of all cash flows from a project; a common rule is to accept projects with NPV > 0.
Main areas of corporate finance
1) Capital budgeting — picking projects
– Identify potential capital expenditures.
– Forecast the project’s incremental cash flows (inflows and outflows) over its life.
– Discount future cash flows back to present value using an appropriate discount rate (reflecting project risk and cost of capital).
– Compare projects and choose those that increase firm value.
2) Capital financing — choosing a funding mix
– Sources include bank loans, bonds (debt) and issuing new shares (equity).
– Debt increases fixed obligations (interest and principal) and can raise default risk; equity dilutes existing owners’ share of future earnings.
– The optimal mix balances cost, risk, tax effects, and control considerations so the company can fund its investments.
3) Working capital management — managing short‑term cash needs
– Monitor and manage cash, inventories, accounts receivable (money owed to the firm), and accounts payable (money the firm owes).
– Ensure there is enough short‑term liquidity to meet obligations without holding excessive idle cash that lowers returns.
– Options for short‑term liquidity include lines of credit and issuing commercial paper.
Typical activities performed by a corporate finance department
– Build and evaluate financial models for proposed projects.
– Prepare budgets and forecasts.
– Structure financing transactions (loans, bond issues, equity raises).
– Manage cash and short‑term financing.
– Set dividend policy and communicate with investors.
– Coordinate with accounting and tax to ensure compliance and efficient tax planning.
How corporate finance differs from “finance” more broadly
“Finance” is the umbrella field that also includes personal finance (household money management) and public finance (government budgets and taxation). Corporate finance is the subfield focused specifically on financial decisions within companies.
Practical checklist for a capital decision (step‑by