What is corporate finance?

Corporate finance is a prevalent concept and much-discussed, but maybe not everyone knows exactly what it is and the most reliable definitions. For some authors, corporate finance is that commercial activity that concerns the acquisition and management of capital funds to meet the financial needs and, in general, the objectives of a commercial enterprise. According to other authors, however, corporate finance can be defined in a broad sense as the planning, collection, control, administration of the funds that are used in the company. Furthermore, for Pachter and Wert, corporate finance mainly deals with the collection, administration, and disbursement of funds by private business units operating in non-financial sectors of industry.

Trying to draw the necessary conclusions from all these definitions, we can then define corporate finance as that set of activities that deal with budgeting, financial forecasting, liquidity management, credit administration, investment analysis, and corporate funds supply. A rather complex range of activities, which induces the companies concerned - that is, all of them! - adopt modern technologies suitable for the above purposes.

According to the Encyclopedia of Social Sciences, corporate finance deals with the financial problems of businesses. These problems include the financial aspects of launching new businesses and their administration during the initial development phase. The accounting problems related to the distinction between capital and income, the administrative issues created by growth and expansion, and, finally, the issues financial linked to the adjustments needed to strengthen or rehabilitate a company that is experiencing financial difficulties.

In short, a range of various activities that are obviously quite important and complex, which should not be managed internally except through expert staff that can support the decision-maker in the most strategic choices for the life and development of the business organization, whatever it may be. All companies must deal with a necessary and personalized management of corporate finance from small companies to large corporations.

The role of corporate finance

The corporate financial function performs the important function of supporting management in decisions in an operational sense (short term: prospect within 12 months) and in a strategic sense (medium / long term: prospect beyond 12 months). Deals with: short, medium and long term financial planning; liquidity governance; evaluation of the expected and real return on investment (ROI ), finding and allocation of financial resources; establishment of credit relationships with customers (with the marketing function ); definition of the payment conditions of the suppliers (with the production function); valuation of the company's movable and real estate assets; determination of the sale price of goods/services and of the reference benchmarks; financial plan management.

A person who has competence, authority, and charisma influences strategic choices. The strategic plan contains assessments on the political and economic context by the top management, identifying general objectives of turnover, income, employment, development. Coordinates horizontal and vertical integration processes, a spin-off of business branches, diversification.

In the strategic planning, again by top management and the economic entity, the objectives to be pursued in the m / l term are set more precisely: for example, the increase in market shares and operating profit through dimensional growth.

In this context, the financial function is called by the right to perform its duties, identifying the investment areas, and acquiring loans. It is placed in a line position in the management structure, participating in operating policies' definition. The distinction between financial planning (by top management in concert with finance) and implementation of choices (delegated to the lower hierarchical level) is clear-cut.

The financial function deals with the management and analysis of monetary flows, and is organized within the company (it is never delegated externally); in particular, the necessary capital is procured to acquire the inputs of the production and to cover the financial needs. It mediates between productions (a function that generates money flows out) and marketing that generates money flows in.

Financial management is represented by the manifestation of income (for example, dividends from equity investments) and charges (for example, interest expense on bank loans) of such nature, and supports characteristic management. It is framed in a short and medium-term technical horizon to optimize the use of fundraising.

Organizational position

The managers of the financial function take care of the best possible supply of financial resources. The manager or individual collegiate plays a role similar to that of the finance officer and contributes with top management to set the valuation coefficients of the products sold and then plays a role similar to the treasury officer. Because he not only collects or contributes to collect the credits and collects payments but also evaluates and chooses the various job offers, that is, it contributes to capital budgeting decisions, which is the role of senior management. The chief financial officer may try to demonstrate which projects are to be financed or not. The head of the finance function cannot be held responsible for the investment plan, which is the prerogative of senior management. The financial department carries out oversight of investment policies. Therefore, the managers' main tasks are direct management tasks, treasury management, and related planning in a very short time, managing the financial plan after the term, financial control tasks, and various atypical financial tasks.