Corporate Finance

When you look at the major corporate scandals over the past two decades, nearly all of them have focused around one area of corporate law: finance. Finance covers basically any area of a business that affects the firm’s ability to make money. This includes how the company gets money to fund its projects, where it invests its own money, and how it handles dividends on company stock.

External Financing

This is one of the basic ways a firm can procure money to fund its growth. It is “external” because the funds are gotten from outside the firm—several important types of external financing are IPO stock offerings, seasoned equity offerings, and credit. Firms have to decide whether they want to be a private company and raise the cash themselves, or to go public with an IPO.

Capital Budgeting

This fancy term simply describes the process of deciding where a company’s capital is going to go. The firm’s financiers have to balance the reward of certain projects versus their risk, and decide which projects make sense for the long term health of the company. New office space, research and development, or new machinery are some areas that a company might select for its capital budgeting.

Financial Management

This describes the overall financial operations of a company. It involves making sure the company can pay its bills and taxes on time, balancing its debt and equity, and completing seasonal balance sheets, as well as deciding what to do with the company’s profit.

Corporate Governance

It’s not surprising that effective governance also falls under the heading of effective finance. Since most firm’s internal scandals result from money problems, having a well-balanced and checked corporate governance structure is key to averting such issues. Internal audits, which check the company’s books for accuracy, are one way to do this. The firm must also ensure that it is operating within the law of the country it is in; for example, in the U.S., the Sarbanes-Oxley Act of 2002 calls for internal controls and accurate disclosure of financial reports.

Risk Management

Corporate financiers are also in charge of protecting their company from large amounts of risk. Risk can come from financial markets or instruments, such as shifting currency rates, fluctuating interest, or commodity price changes, as well as unforeseeable events like fires or natural disasters. Moderating the level of risk is important for bringing the biggest return to shareholders—while some risk is necessary, too much can result in an adverse financial quarter for the company.

 

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