Corporate finance has become increasingly prominent over the past few years. This has, in turn, led to an increase in the demand for corporate finance and investment banking jobs as well as courses in this field. Organisations are now giving greater recognition to those people who have completed a programme in corporate finance.
If you want to know what exactly is included in this field, or if you already have an idea and want to experience a career in finance, then read the following blog post.
What is corporate finance?
It involves the capital structure of an organisation including the funding and the steps taken by the management to help in the increase in the value of the organisation. It also consists of various analysis methods and tools that are used for allocating financial resources within the organisation.
The primary purpose of corporate finance is to maximise the revenue in an organisation while carefully balancing risk.
There are three activities that govern this domain as a whole, including:
- Capital budgeting and investments: Capital budgeting and investing involves deciding where to allocate the organisation’s long-term capital assets in order to obtain high-risk returns. This is done with the help of detailed financial analysis and financial accounting tools which assist organisations in ascertaining estimated cash flows, capital expenditures, proposed revenue and profit. Organisations also make use of financial modelling techniques to calculate and compare the economic impact of various investment opportunities.
- Capital financing: This involves deciding how to finance the organisation’s capital investments with the help of debt, equity or a combination of both. Long-term funding for investments or expenditures can be obtained by issuing securities in markets or selling company shares. Equity and debt need to be carefully managed and balanced; because too much equity dilutes the company value for investors and greater debt risks the survival of the organisation. In conclusion, it is the responsibility of the finance professionals to stabilise the capital structure by lowering the weighted average cost of capital (WACC) of the organisation as low as possible. WACC is the average rate that an organisation is required to pay to its shareholders to finance its assets.
- Return of capital and dividends: This activity involves deciding how to divide the organisation’s excess revenue. Management may decide to retain the earnings for investments in the future or disperse the earnings among the shareholders in the form of dividends. Retaining earnings is usually considered to be the best method for funding the expansion plans for any organisation’s business. This is because the company does not have to incur any new debts and also does not need to reduce the equity value by offering more shares to the public. Ultimately, management needs to examine if the return on capital investment is more than the cost of capital of the organisation. If that is the case, then they should retain the earnings for future use.
The importance of corporate finance:
- Decision-making: There are a number of key decisions that need to be taken when discussing the availability of finance from several sources. When an organisation invests in a new business, it must examine if the business would be financially viable, for instance, would it earn the expected amount of revenue. Further decisions that have to be made in such scenarios include examining the availability of budget and the profitability of the venture.
- Research and development (R&D): Corporate financial managers encourage their companies to regularly innovate and perform R&D on their products and markets. The services and products of any company must be updated on a regular basis to keep up with the changing world. Businesses often conduct market surveys, customer feedback, market analysis and focus groups for improving their services and products. These activities can only be carried out with the support of corporate finance.
- Reducing manufacturing cost: Corporate financial management also plays a role in reducing overall cost, by placing bulk orders for raw materials, purchasing software to reduce paperwork and buying the latest automated machinery for mass production. With the help of corporate financial advisors, organisations establish innovative ideas and methods to reduce operational and manufacturing costs.
- Raising capital: Another important role of corporate finance is to raise funds and capital in organisations. Capital can be raised by, for example, selling debentures, bonds or shares of the firm.
- Diversification and growth: When companies are deciding to expand or diversify, they have to make key decisions regarding investment, finance and the risk involved. Corporate finance aids firms by handling these important decisions.
How to enter the corporate finance field
There are many ways to get into this field, the most common are highlighted below:
- Working in an accountancy firm or an investment bank and studying for the ACCA. Having a strong foundation and an accounting qualification will help you in landing investment banking jobs.
- Joining an advisory firm or investment bank while at university as a financial analyst intern, and then joining the field after graduation and after completing a corporate finance course.
- Studying corporate finance after graduating and then joining the field as an analyst.
Top jobs in the corporate finance field:
Take a look at some of the most popular corporate finance jobs that you can take up:
- Financial Analyst;
- Cost Analyst;
- Credit Manager;
- Cash Manager;
- Benefits Officer;
- Real Estate Officer;
- Investor Relations Officer;
If you are interested in breaking into the corporate finance field, London School of Business and Finance (LSBF) offers a Postgraduate Certificate in Corporate Finance.
This article was written by Varun Mehta and edited by Amelia Hayward-Cole.