What is 'Corporate Finance'

Corporate finance is a concentration of financial management concerned with all of the financial
activities related to running a corporation. Corporate finance is primarily concerned with
maximizing shareholder value through long-term and short-term financial planning. Everything
from capital investment decisions to investment banking falls under the domain of corporate
finance.
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BREAKING DOWN 'Corporate Finance'

Corporate finance involves financial management, financial analysis, accounting and investment
banking. It can refer to a department or business unit, sometimes structured internally and
sometimes outsourced, that prepares all of a company's financial numbers and then makes
business recommendations based on those numbers.
One of the most important financial activities that a corporate finance department is involved
with are capital investment decisions. It first decides if a proposed investment should be made. If
the investment decision is accepted, corporate finance professionals then decide how the
company should pay for it with equity, debt or combination of both. The department also
makes reinvestment decisions, deciding to either offer dividends or plow profits back into the
company for growth. Short-term items include the management of current assets and current
liabilities, inventory control, investments and other short-term financial issues. Long-term items
include new capital purchases and investments.

Underlying Principles and Activities of Corporate Finance

The leading principle of corporate finance is the implementation of financial controls. In
business, agency problems can arise where the owners or leaders of a company prioritize
personal interests over the interests of the company itself. To protect companies against financial
pitfalls like this, corporate finance works to separate ownership from financial management.

Further, corporate finance aids a company's leadership team with the evaluation and analysis of a
company's financial statements. Based on the analysis, corporate finance professionals make a
recommendation that furthers the company's initiatives.
For example, a public corporation is assessing expansion options through the construction of a
new manufacturing plant. The options are to finance it internally with cash or externally with
corporate debt. After preparing the company's financial statements, the chief financial officer
(CFO) looks at the balance sheet and notices that it does not have adequate cash on hand to both
fund the plant and cover its working capital requirements. Instead, the CFO runs an analysis and
finds that the best course of action is to issue a corporate bond of $1 million at a 5% interest rate
and cover the monthly interest payments until sufficient cash is generated by the plant to pay
down the principal. This decision-making process is corporate finance in action.
Read more: Corporate Finance Definition | Investopedia
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