Monday, May 11, 2015

What is Corporate Finance?

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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