1) Background and basics

 

What is finance?

Finance is about providing/being provided with capital (money). Once the capital has been provided there is an obligation to provide something in return – examples would include ownership/part ownership of an asset (asset can mean just about anything, including a whole business) or interest payments/capital repayments.

What is corporate finance?

In its broadest sense, corporate finance is finance, but specifically for businesses. Why would a business need money though – isn’t a business supposed to make its own money? Businesses may need money for a number of reasons, including:

1) Starting up the business (seed/venture capital),

2) Expanding the business ‘organically’ i.e. through normal
growth in markets and/or market share, usually in the form of capital for capital expenditure – aka capex,

3) Capital for working capital purposes,

4) Capital for buying other businesses,

5) Returning capital to shareholders (dividends, share buybacks),

6) Recapitalisation of businesses (often linked to return of capital)

7) Change of control of businesses

For the last three, the money isn’t strictly needed by the business, but rather by the owner/buyer, (who may or may not be another business).

In practice, working in corporate finance is often about the last two, because this is where the big money can be made (unless you normally have very large capital requirements, e.g. if you’re GE or Siemens).

The key concept within a corporation, particularly a publicly listed one, is the separation of management and ownership. This principle actually makes a lot of sense in many cases (do you really want to have to deal with everything that goes on within a large complex international company?). Separation of ownership makes corporations much more flexible in terms of sources of finance, because separating ownership allows multiple owners in multiple locations. Owners can even buy or sell their share of ownership (e.g. on stock markets) allowing them to crystalise its value.

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 Posted by at 11:35 am

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