To answer
this question, we must know the core of firm, the purpose, before. What
is the purpose of firm? It is to create value for shareholders (owners).
So, the shareholder's value is important for all part of the firm. That
value is reflected in financial activities which the division or department
that oversees the financial activities do. That is the meaning of the corporate finance.
The Balance
Sheet Model
All
financial activities that we discuss before are recorded in the balance sheet
of company.To get deeper understanding about corporate finance, let's look at
the figure below, we can see and understand the concept of the balance sheet
model that will describe all financial activities that company do.
Based on the
figure, we can see assets of the firm are on the left side of balance sheet.
And also we can see that there are two types of assets, which are:
1.
Fixed assets
All assets that will last a long time. Some fixed assets are
tangible, such as machinery and equipment. Other fixed assets are intangible,
such as patents and trademarks.
2.
Current assets
All assets
that have short lives, such as inventory.
On the other
side of balance sheet, right side, we can see the form of company financing.
Why the company need financing? Because company needs money for investing to
assets. There are two kinds of financing that company can obtain, which are:
1.
Debt (loan agreements)
Debt like asset which classified as:
a.
current liability
All short term debt that must
be repaid within one year
b.
long term debt
All debt that mustn't be repaid
within one year
2.
Equity shares (stock certificates)
Equity
shares is difference between the value of the assets and the debt of the firm
Based on the
balance sheet model concept, we can conclude that there are three questions
will solved by Finance, which are:
1.
In what long-lived assets should the firm invest?
The answer of this question
will involve the capital budgeting that describes
the process of making and managing expenditures on long-lived assets.
2.
How can the firm raise cash for required capital
expenditures?
This question will be discussed
in the firm’s capital structure, which represents the proportions
of the firm’s financing from current and long-term debt and equity.
3.
How should short-term operating cash flows be managed?
This question concern with a
firm’s net working capital defined as current assets minus
current liabilities that must be managed by finance manager.
By : Dera
Hafiyyan as Finance Lover
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