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Corporate finance
Business

What is Corporate Finance? EXPLAINED

The estimated reading time for this post is 149 seconds

Corporate finance is the part of business management that deals with the financial decisions of a business. Financial decisions determine how much a business takes in from its customers (revenue) and how much it pays out to its suppliers and employees (cost). The financial decisions of a business do not include those involved in marketing, production, or purchasing. Financial decisions are made by the business owner, company president, or other top executives.

The Managerial Approach to Financial Decisions

The financial manager approaches the financial decisions of a business as if it were a household. As the household head, you have two basic financial goals: to get the most income you can for your household and minimize your household expenses. The financial manager of a business has the same two goals: to get the most income for the business and to minimize the business’s costs.

Revenue, Expenses, and Profit

When you look at your household’s income and expenses, you see that your financial decisions result from whether your household makes a profit or a loss. It is the same for the business manager. When you look at a business’s revenue and expenses, you see whether the business makes a profit or a loss. In either case, profit is called net income. The financial manager’s job is to make sure that net income is as high as possible.

What types of corporate finance exist?

Consider the types of corporate finance that exist and make sure that you understand how they are connected to the business’s financial decisions.

  • Investment Decisions: Investment decisions are decisions made by owners and managers of businesses about financing the business. In other words, investment decisions are made about how and where to get the money to start or expand a business. For example, suppose you own a small business. You have been thinking about building a new store. Before you do that, you must first decide whether you should finance the store by borrowing money or raising new capital by selling stock or bonds.
  • Financing Decisions: Financing decisions are decisions made by owners and managers of businesses about paying for the investments that have already been made. For example, suppose you have just borrowed money to build a new store. How should you pay back the money you borrowed? You have three choices: you can pay back the loan in cash, you can pay it back by making regular interest payments, or you can pay it back in both cash and interest. If you are not going to make regular interest payments, you have to decide whether to pay back your loan all at once or gradually pay it back. In either case, you must decide how much you should pay back each month or each year. Those are financing decisions.

The financial manager’s job is to make the best investment and financing decisions possible. The best decisions are those that get the highest return on investment.

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