Corporate Finance (What are they, Objectives and Tools)

The corporate finance They are those that study the decisions that must be made within a company and how these affect its financial situation. What corporate finance seeks is to increase the value and sustainability of the company, making it increase its capital and grow with the decisions made.

This study focuses on finding financial solutions so that the shareholders of the company can obtain greater benefit from it, making it more sustainable within the current market, increasing its value, production and sales. It is merely in charge of decision-making that pertains to the finances and economic situation of the company.

Goals of corporate finance

Main objectives of thecorporate finance They are:

• Capital structure of the company: with the analysis of the options and the studies of the decisions taken, it seeks to increase the capital of the company, so that it has a more economic situation sustainable.
• Investment management: they study the possible investments of the current capital, in order to obtain greater economic benefit, making the company advance with the ideal investments.
• Tax planning: this refers to the tax scope of the company, exactly the payment of taxes that must be made.
• Treasury and control of available cash: with this the area where all the movements that include cash are made are organized.
• Analysis of finances: study of the situation, stability, and profitability of the company in terms of its finances. Study the possible businesses that the company may take in the future.
• Financing future projects: talk about the savings fund that the company has to see if it is profitable to commit to other businesses, in addition to whether this would turn out to be a good investment.
• Emerging markets: study potential profitable markets, as well as investing in them.

Those responsible for this area will focus solely on those objectives, all in the financial field.

Corporate finance tools

People in charge of finances use essential tools for good decision-making.

Profitability index

This focuses on the investment made and the profitability of the new project in the current market. This studies the value thrown by a certain figure of the total investment.

Accounting performance

In a relation of figures, where the total amount of investment is applied to obtain a percentage of the supposed profitability of the project. The result must be equal to or greater than the amount invested, logically, in order to obtain profits. In this study it is not included in the time of obtaining the earnings, but the total amount.

Internal rates of return

This studies the annual profitability of the project and the results in terms of the figures obtained. The initial investment value and the results of assets are taken as a reference over time. An annual study is usually done to see if it has been profitable.

Decisions that encompass corporate finance

Decisions to seek the highest profitability of the company are classified into two:

• Short-term decisions- Financial decisions revolve around the amount of existing assets and liabilities. Assets are based on movements like staff salaries and liabilities on how to get more sustainability. Analysts will seek to radically reduce the debts of the company, and study the actions.
• Long-term decisions: this focuses on possible investments with the company's own capital. The managers will decide if it is carried out based on a cash fund, pending debts or with the percentage investment of each of the company's investors.

These are the more specific decisions:

• Level of indebtedness and leverage: this based on the possibility of making a profit from the outstanding debts of the company, also the decision to pay off pending commitments.
• Need for new investments: make the decision to invest in future projects that can enhance the sustainability of the company.
• Cash: makes decisions regarding the destination of the cash that is held as a fund. Usually this is to solve certain debts or for investment.
• Role model: they make decisions about the path the company will follow, as long as it is beneficial for everyone
• Retribution: the decision is made to return the money that all investors have invested.

Classification of corporate finance

The classification of corporate finance varies according to decision making:

• Management decisions: the tools and types of analysis used are those that classify this type of corporate finance. Here the number of personnel, the size of the company, the monthly salary and the process of growth of the same will depend.
• Investment decisions: this works by means of the general study of the company with reference to the investment of the funds that it has. It acts when you have the final data of the study, because you already know what to invest in, whether it be an increase in personnel, new machinery for the production process, etc.
• Dividing decisions: this type of finance seeks to find a balance between the shareholders of the company. It tries to achieve economic stability and limits the resources of the company, in order to try to have a larger investment fund or capital.
• Financing decisions: This is about the analysis of obtaining funds to invest in a new project. Here a preliminary study must be carried out of what the company has, its net capital, assets and fixed liabilities, in order to establish a real figure, which will be directed to the investment project. In the event that the company is going through a bad financial moment, this with the financing study, will look for alternatives to find the necessary funds for the project.

The corporate finance They are widely used within companies, since they allow organizing and studying possible investment plans, as well as markets of the future, which can make the current business more stable, also consciously use the money that is had as an investment fund or capital.

This area is important when the company is going through a bad economic time and wants to do a good use of its assets, helps in growth and stability, both financial and of the workers.