The Corporate Finance : Meaning, Definition and Principles

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What is the Meaning of Corporate Finance

Corporate finance is one of the basic components in deciding how a business or institution will run. Being amazed by the fact why it is so; you always want to know why corporate finance has such importance. Whenever an individual or group start a business apart from the innovative skills and ideas that are of utmost importance, money is required for building or establishing a business. Be it any income generating activity on large or small scale requires finance, rightly considered to be as the backbone of business startups. One not only requires finances to start a business as promotional finance but Also in long run as development finance to sustain your firm for long.

corporate finance definition

There are ample amount of sources which you can approach or through which you can raise funds such as from crowdfunding your personal savings, borrowing from friends, family etc. The same thumb rule is also applied to corporations. In the present article, we will be discussing, what are the principles of corporate finance and how we can incorporate them while doing business or in startups.

Majorly there are three most fundamental principles of corporate finance which are investment, financing and dividend principles; therefore one should take care of them while formulating any business strategy. Below is the description of all the aforementioned three principles of corporate financing.

corporate finance

Investment Principle:

The very first principle which we will talk about is investment principle. It is quite simple and practical to understand because it revolves around the concept that all business have resources which need to be allocated in the most efficient and planned manner. It is the first important decision and should be taken with more precision and wisely because such decisions will decide that whether your business will only provide you revenue opportunities or it can also save money for future tasks, working capital decisions such as credit days allotted to customers etc. comes under this. As corporate finances also measure the return on planned investment decisions after comparing it to the least tolerable hurdle or difficulty rate and reaching at the decision whether the project undertaken is feasible or not.

Financing Principle:

the Second principle is all about how to create and accumulate more funds. Most of the business derives their funds either from debt or equity or both. The investment decision which we discussed above, after we finalize the mix of equity and debt and its effects for least acceptable hurdle, we later decide whether the mix chosen is appropriate or not in the financing section. In this, the financier is endowed with the responsibility to make sure that whether the business or project proposed consists of the right amount of capital and the right mix of debt, equity and other financial inputs. To determine the optimal mix we study situations where optimal financing mix stabilizes the minimum acceptable hurdle rate along with analyzing the effects on firm due to the change in capital structure. After this, we decide whether the financing should be long term or short term and also include considerations such as taxes and formulate strong decisions for the structure of financing.

Dividend Principle:

The third principle which is dividend principle comes into play when the company or business has reached a stage where they grow and mature and cash flow that they generating is exceeding the losses or expected hurdle rate. During this stage, a company needs to determine various ways of rewarding the owners with it. Here, the major objective is to decide whether the excess cash flow should be retained or should be given to the investors/owners. Most companies which are public holdings provide the option of either pay off dividends or buy back stocks.

A career in corporate finance is quite interesting and with time the demands of this field are also soaring. Other than that if any business wants to flourish, it should keep the aforementioned principles in their mind so that it can be helpful in drafting more appropriate and profitable strategies and inputs.

by Sifa Singh

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