Corporate Finance: Introduction, Need and Importance
What is Corporate Finance?
Corporate Finance refers to the area of finance that deals with the various sources of investment, the capital structure, the actions taken by the managers to increase the value of the organization to the stakeholders.
Corporate Finance is the division of the company that deals with the financial and the investment decisions. The primary aim of corporate finance is concerned with maximizing the value of the stakeholder by long term and short term financial planning and execution of the several policies and procedures. The activities of the corporate finance range from capital investment decisions to investment banking.
Have a look at the following sources of Corporate Finance:
- Public Deposits
- Indigenous Banks
- Retained Earnings
- Special Financial Institutions
Need for Corporate Finance
Finance is the blood of every business and is required by all types of industries. Money is very essential to start up a new business and to run it successfully. Finance plays an important role in the survival, stability, and growth of the business. Thus, it is not possible for a business to survive without finance.
Importance of Corporate Finance
The following points bring out the importance of corporate finance:
- Research and Development
Corporate Finance is required for Research and Development. Today, it is very difficult for a business to survive without continuous research and development. Thus, every company needs to make certain changes in some way or the other way.
- Motivating Employees
The managers and the employees working in the organization must be continuously motivated in order to enhance their performance. They must be provided with financial incentives, such as bonus, higher salaries etc. If possible, they must also be given non-financial incentives such as the transport facilities, canteen facilities (eatery) etc. All this is possible through finance.
- Promoting a Company
Finance is also required at the time of establishment of the business or the company. It is needed to prepare the Project Report, Memorandum of Association, Articles of Association, Prospectus etc. Finance plays a vital role in making large purchases like land and buildings, plant machinery and other fixed assets. Most importantly, it is required for the purchased of the raw materials. Finance is also important to pay off the wages, salaries and other short term expenses. In short, no company works without finance.
- Smooth Conduct of Business
In order to conduct the business smoothly, there is a need for finance. Finance here plays the role of working capital. It is important for paying the day-to-day expenses of the company. Advertising, sales promotion, distribution etc., all is done with the use of finance.
- Expansion and Diversification
The expansion means to increase the size of the company. Diversification means to produce and trade new products of the business. For expansion and diversification, there is a need for modern machines and techniques. So, finance becomes mandatory to expand and diversify the business.
- Government Agencies
There are many government agencies such as Income Tax Authorities, Sales Tax Authorities, Registrar of Companies, Excise Authorities, etc. The business is responsible for paying taxes and duties of these agencies, through finance.
- Dividends and Interests
It is the duty of the company to pay the dividends to the shareholders, interests to the debenture holders, banks etc. Also, the loans have to repaid by the company. Hence, to carry out all these activities, finance is important.
- Replacement of Assets
The main assets of the company are plant and machinery, as these are used to produce goods and services. With the passage of time, these assets become old and obsolete and need to be replaced by new assets. Thus, finance is needed to buy new assets.