what is corporate finance – Concepts and Meaning

Rate this post

Concept of corporate finance

Concept of corporate finance

There are three domains of finance – personal finance, business finance, and public finance. Personal finance deals with the management of the financial resources of an individual. The financial resources could be money or any other financial assets. Corporate finance, also known as business finance refers to the management of financial resources of a business entity. Similarly, public finance refers to the management of the financial resources of a government. A government could be the local government like District Development Committee or the central government like Nepal Government. Since public finance and personal finance are kept outside the scope of the bank, we deal only with corporate finance.

Nowadays, business finance, corporate finance, financial management, and managerial finance are used as synonyms of one another. At the early stage of the development of finance, academics and practitioners used the term business finance. Later on, they used corporate finance, instead of business finance. The rationale behind the use of corporate finance was the dominance of the corporate forms of business organizations in the business world. Traditionally, corporate finance used to focus only on the procurement of funds required to set up a corporation (company) and the expansion of its activities. Accordingly, the responsibility of the financial manager was limited only to estimate the financial requirements of a corporation and raise the funds to meet the requirement.

However, with the passage of time the scope of corporate finance widened. Now it is not limited to the fundraising activities; it has widened to cover the acquisition, financing, and management aspects of assets of the corporation. This approach to the concept of corporate finance is known as the modern concept. To illustrate this concept, let us take the example of a hypothetical corporation – Kathmandu water supply ltd. Established to supply drinking water in Kathmandu valley. In order to do so firstly, this corporation has to invest huge investment in fixed assets such as a reservoir, canal, water treatment plant, etc. deciding upon investing in fixed assets is known as the investment decision or capital expenditure decision. Secondly, this corporation has to manage the funds to finance this project. The fund may be managed by retaining the profit made by the corporation or by raising the fund from the capital market. Further, the fund may be raised in the form of equity capital or debt capital. The decisions related to these issues are known as financing decisions. Thirdly, this corporation has to manage its current assets effectively. The investment decision and financing decisions do not bear any fruits without making correct current assets management decisions or liquidity management decisions. The management of current assets includes management of cash, receivables (credit sales yet to be collected), and inventory (the stock or raw materials, semi-finished goods, and finish goods). Current assets need to be managed their obligations in time. All these three decisions (investment, financing, and liquidity management) are made at the managerial level. This is the reason why corporate finance is called managerial finance as well and is understood as a decision-making process of these managerial decisions; investment decision, financing decision, and current assets management decision or liquidity management decision. In contrast to the traditional view of corporate finance, the modern view of corporate finance is not concerned only with the financing decision but also with the investment decision and current assets management decision. In other words, corporate finance today is more concerned with effective procurement and allocation of funds in different activities and projects. In short, corporate finance is the study of the ways to address the following issues in a firm.

  • What long-term investments should a firm take on? (investment decision)
  • Where the firm will get the long-term fund to pay for the investment? (financing decision)
  • How to firm will manage its everyday financial activities such as collecting from customers and paying suppliers? (working capital management)
  • How the firm should compensate to its shareholders? (dividend decision)  

 Visit More Courses as :  

To Visit Press/Touch Click Here Button

#. Courses of Banking  Click Here.

#. Courses of Business Research Methods  Click Here.

#. Courses of Marketing Click Here.

#. Courses of A Framework for Organizational Behaviour  Click Here.

#. Courses of Principle of Management Click Here.

#. Courses of Human Resource Management Click Here.

#. Courses of Business Economic – II Click Here.

This site is a free online educational website portal. It collects & shares educational as well as job related contents and Careers Offers.

Leave a Comment

error: Content is protected !!