Corporate Finance is not hard to describe. It is the financing of a corporation’s activities through borrowing and investment.
Nevertheless, Corporate Finance has come to mean many things, depending on who you talk to. This is because there can be many parties involved in the process of financing: treasurers, accountants, CFOs, CEOs, bankers, investors, lenders, and lawyers.
From a Treasury perspective, Corporate Finance is the work involved in answering one simple question: what sources should we use to fund our activities in the long-term and in the short-term, and why? Most corporate treasurers break Corporate Finance into two fundamental activities: Capital Budgeting (for long-term, strategic planning) and Working Capital Management (for short-term, tactical needs). Within treasuryXL, we work with corporate treasurers, and we will adopt their perspective.
Note: Perhaps the most common alternative perspective on Corporate Finance comes from bankers. When bankers talk about Corporate Finance, they are often referring to a particular line of business for the bank, which involves raising money for corporations or acting as advisers on their behalf. They see Corporate Finance not from the perspective of an individual corporation, but from the perspective of a broker, who facilitates the movement of capital between corporations and investors. As a whole, the connections between these buyers and sellers of financing are known as the “capital markets”. Other bankers, auditors, and advisers often equate the term “corporate finance” with the term “M&A”, or mergers and acquisitions. These bankers facilitate the buying and selling of companies, and they think of such transactions as a form of corporate finance because an M&A deal will often involve the infusion of cash into the company being acquired. For example, a corporate finance adviser might be a broker between an entrepreneur with a company for sale and the potential new owner of the entrepreneur’s company. This corporate finance adviser acts on behalf of one of the two parties, but this sort of Corporate Finance is very different from the world of Treasury.
What does a Corporate Finance Director do
Within most large companies with a group treasurer, there is a corporate finance director who reports to the treasurer. The most important task of the corporate finance director is to ensure that the company is able to finance both its current and future activities. To do this, the corporate finance director must be deeply familiar with the financial structure and overall profitability of the company, the strategy of the Board of Directors, any plans for long-term borrowing and investment, and competitive risks and threats, such as potential corporate takeovers. The corporate finance director will have to translate all of this knowledge into an extensive capital budgeting plan. This plan will identify where funding for the company’s strategy can be found, and when it should be tapped. Timing is extremely important, so a distinction is often made between long- and short-term financing operations.
For long-term financing, funding can be found from both internal and external sources. Internal sources might be tapped from company savings or from current or new owners who want to put more money into the business. External sources often include regular bank funding (usually structured as loans) but may also include non-bank lenders or investors. In any case, the corporate finance director is either in the lead or is heavily involved in such strategic, long-term financing transactions.
In short-term financing, by contrast, the corporate finance director usually has a strictly analytical role. He or she prepares the best solutions for sudden or short-term financing needs, but is not usually involved in the operational aspects, which are often handled by cash managers. For example, from time to time the cash flow forecasting of a company may be inaccurate, and a situation may arise in which salaries and suppliers cannot be paid in time. (In this situation, the company is short on cash. It might have assets that it could sell in exchange for cash, but such assets might not be very “liquid”, in the sense that they cannot be sold right away. Such a situation is known as a liquidity crisis.) A good corporate finance director will have created a financial toolkit to use in such a situation. That toolkit will outline the procedures for the following potential solutions to the liquidity crisis:
- short term credit facilities with one or more banks,
- a factoring program, where a third party pays bills before the company’s actual clients do,
- negotiated credit terms with suppliers, which allow the company to pay at a later date, or
- leasing programs that avoid the expenditure of funds to buy assets outright.
Other tasks that the corporate finance director might work on can be quite diverse. He or she might be involved in the dividend strategy: how much of our profits shall we pay to our shareholders? If the company has a lot of excess cash because it is doing well or perhaps because it just sold some shares, the director may be responsible for the investment strategy: shall we leave this money in the bank, or are there better investment alternatives?
Examples of Corporate Finance activities
While the following list of items is not exhaustive, these are the most common corporate finance activities:
- Executing an initial public offering (IPO). An IPO is undertaken when a privately funded company decides to be listed on a stock exchange so that it can access funding from capital markets.
- Getting a credit rating. A good credit rating will often lead to better borrowing conditions. To achieve this, the corporate finance director will ask an independent rating agency to write a report about creditworthiness.
- Doing a bond issue. A bond is a form of long-term loan, which is funded by the purchaser of the bond, the initial “bondholder”. Such bonds can be bought and sold in the public markets, and whoever holds the bond will receive interest and be repaid according to the terms of the bond agreement.
- Securing a loan from a bank. The terms of such loans are often either based on the company’s credit rating, or are asset backed. If they are asset backed, the bank can claim the company’s property in case of default.
- Redefining and renegotiating payment terms with suppliers or customers.
- Developing and executing a dividend program for shareholders.
Frequently asked Corporate Finance questions
- Q: Who reports to whom? The corporate treasurer to the corporate finance director, or the other way around?
There is no single reporting structure, but in most companies the corporate finance director reports to the group treasurer.
- Q: Who holds formal responsibility in corporate finance transactions?
The corporate finance director cannot claim final responsibility in all transactions. Typically, it is the CFO or the CEO who does. Due to the strategic impact of certain financing deals, often the CFO and CEO will want to be prominent. This is especially true in equity deals, such as initial public offerings (IPOs).
- Q: Why is there so much confusion about roles and activities in Corporate Finance?
As opposed to accountants, controllers, and auditors, the place of the corporate finance director within the hierarchy of many companies is not well defined. The activities of the corporate finance director often have strategic impact, and many want to take credit for the resulting financing deals for the company. Furthermore, although they have strategic impact, corporate finance activities can be managed by one or two independent individuals. This makes a large corporate finance team unnecessary, and it lends fluidity to the place of Corporate Finance within the hierarchy of most organizations.
Corporate Finance summary
Corporate Finance is of strategic importance to a company, and its activities are often very visible to the owners and Board of Directors. Proper Corporate Finance can only be executed well if done close to where important decisions are being made. It involves the long- and short-term funding of a company and the investment of its assets, but it is ultimately concerned with corporate strategy, which is developed at the highest levels of the organization.
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