When it comes to understanding finance in business, it’s worth noting right away that the world of modern finance is no longer what it used to be – where the finance department only carries out accountant-based functions. Rather, it has evolved significantly to include a more holistic value-add to businesses. Now, for example, a Chief Financial Officer (CFO) not only focuses on numbers, but also brings meaningful strategy and leadership to a business, thanks to technological advancements in financial automation.1 People in corporate finance also take care of a business’s funding, and the tools and financial analysis used to distribute these financial resources.2 Corporate finance teams identify any potential financial problems the business might encounter, and subsequently prevents them from happening.3 Ultimately, the goal of finance in business is to maximise the value of a business through effective financial planning and resource management, while always being mindful of risk and profitability.4
With this in mind, a strategic use of financial tools, such as loans and investments, is pivotal to the success of a business.5
What activities govern business and finance?
1. Investments and budgeting
Capital budgeting (also known as investment appraisal) is how a business will determine if a project – such as opening a new branch, or investing in new equipment – will increase the value of the company, or be profitable. A project is deemed profitable when the return on investment is greater than the cost of the capital.6
In the planning or budgeting phase, corporate finance also needs a clear understanding of the current finances of the company, where the funding is coming from, and how much the business needs.7
2. Capital financing
Growing the business’s finances through capital investments is perhaps one of the most important activities of a business finance team.8 There are two types of business capital that need financing:
- Fixed capital is used to purchase fixed assets for the business, such as land, buildings, property, and equipment
- Working capital is typically used to procure raw materials and manage fixed expenses such as overheads and wages9
Raising business finance is typically done through resources such as shares, debentures, banks, financial institutions, the sale of stock to equity, and creditors. Corporate finance also oversees the business’s short-term financial management to ensure sufficient liquidity to carry out the day-to-day operations of the business.10
3. Dividends and capital return
How a business structures its capital is vital to optimally increasing the value of the business. A business is determined to be balanced or a risk, based on the ratio between its liability and its equity.11
Career paths in business finance
If you are a business finance specialist, you will typically provide independent financial advice to clients ranging from corporate and financial investors to governments, private companies, and individuals.12
1. Private equity
Private equity companies help raise money for businesses that need more capital. Unlike banks that do this by selling shares or company bonds, a private equity company offers finances directly to the business in return for a stake in ownership.13
Guy Hands, founder and chairman of private equity firm Terra Firma says, “A successful private equity career requires not only mathematical but also interpersonal skills. Numerical ability – the skill to process numbers swiftly and efficiently – is important, but so is relating to people. Businesses ultimately are about individuals and their personalities and to be successful in private equity you need an understanding of the human dimension too.”14
2. Corporate development
If you have a career in corporate development, you are responsible for facilitating and carrying out mergers, negotiating acquisitions, executing divestitures, and ensuring business capital is being raised in-house.15
Treasury is responsible for the business’s capital and manages its liquidity and risk management through forecasting cash flow, managing working capital, and maintaining credit lines.16
Other duties include investing funds and pension funds, managing customer credit, and implementing regulations that keep control over treasury activities, while reporting back to management on the liquidity and financial status of the business.17
4. Investment banking
The investment banking career typically begins with an internship, with most beginner investment bankers starting out as financial analysts.18 Investment bankers help businesses develop strategies to gain access to additional funds. This can be through issuing and selling securities, or by providing critical information about the financial status of companies during a merger, an acquisition, and any other financial transaction.19
With artificial intelligence and machine learning taking more ground in business finance, the days of corporate finance teams keeping records and balancing the books are numbered.20 Corporate finance is now, more than ever, about helping decision-makers make informed business decisions. With their access to new software integrations, it is possible to analyse data patterns, ask the right questions, and communicate key insights about the business’s financials, enabling corporate finance to solve real-world business problems.21
- 1 Gross, M. (Mar, 2018). ‘The importance of finance teams for business success’. Retrieved from CEO Magazine.
- 2 (Nd). ‘Corporate finance overview’. Retrieved from Corporate Finance Institute.
- 3 (Apr, 2017). ‘Importance & scope of corporate finance’. Retrieved from Imarticus.
- 4 (Nd). ‘Corporate finance overview’. Retrieved from Corporate Finance Institute.
- 5 Duff, V. (Jun, 2018). ‘The importance of finance & its role within a business’. Retrieved from Small Business.
- 6 (Nd). ‘Definition of capital budgeting’. Retrieved from Financial Times.
- 7 (Apr, 2017). ‘Importance & scope of corporate finance’. Retrieved from Imarticus.
- 8 (Apr, 2017). ‘Importance & scope of corporate finance’. Retrieved from Imarticus.
- 9 (Apr, 2017). ‘Importance & scope of corporate finance’. Retrieved from Imarticus.
- 10 (Nd). ‘Corporate finance’. Retrieved from Financial Planner World.
- 11 (Nd). ‘Corporate finance overview’. Retrieved from Corporate Finance Institute.
- 12 (Nd). ‘Corporate finance overview’. Retrieved from Deloitte.
- 13 Ahmed, O. (Apr, 2017). ‘From private equity associate to VP in private equity’. Retrieved from Wall Street Oasis.
- 14 (Sep, 2015). ‘Skills you’ll need to work in private equity.’ Retrieved from efinancialcareers.
- 15 (Nd). ‘Corporate development career path’. Retrieved from Corporate Finance Institute.
- 16 (2017). ‘2017 investment banking report: 8 key trends to know’. Retrieved from Wall Street Oasis.
- 17 Bragg, S. (Oct, 2017). ‘Treasurer job description’. Retrieved from Accounting Tools.
- 18 (Nd). ‘How to become an investment banker’. Retrieved from WayUp.
- 19 (Nd). ‘What is an investment banker?’. Retrieved from Financial Planner World.
- 20 Taylor, P. (May, 2018). ‘The robots are coming to corporate finance’. Retrieved from Forbes.
- 21 Mal, D. (Feb, 2018). ‘7 predictions for corporate finance in 2018’. Retrieved from Financial Executives International.