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Corporate finance is the process of matching the capital needs of a business to its operations.
This is distinct from accounting, which is the process of historically recording business activities from a monetized perspective.
Capital is money invested in a company to bring it into existence and to grow and maintain it. This is distinct from working capital which is money to support and maintain the business – purchase of raw materials; stock funding; Financing of credit required between the realization of profit from production and sale.
Corporate finance can start with the tiniest round of money from family and friends, being pumped into a nascent company taking its first steps in the commercial world. At the other end of the spectrum are the multiple layers of corporate debt within giant transnational corporations.
Corporate finance essentially revolves around two types of capital: equity and debt. Equity is the shareholders’ investment in a business with ownership rights. Equity sits within a company for a long period of time in hopes of making a return on investment. This can come either through dividends, which are payments, usually on an annual basis, related to a percentage of stock ownership.
Dividends tend to accumulate only within very large, long-established corporations that already have sufficient capital to adequately finance their plans.
Young, growing and low-profit operations are voracious consumers of all the capital they can access and thus do not tend to create surpluses from which to pay dividends.
In the case of small and growing businesses, equity is constantly sought.
In very young companies, the main sources of investment are often private individuals. Following the family and friends already mentioned, high net worth individuals and experienced sector figures often invest in promising young companies. These are the pre-start up and seed stages.
In the next stage, when there is at least a cohesive business sense, the main investors are venture capital funds, which seek to take promising early stage companies through hopefully highly profitable sales, or accelerated growth to public offerings. There are experts. share.
The other major category of corporate finance related investments comes through debt. Many companies try to avoid diluting their ownership through ongoing equity offerings and decide that they can make a higher rate of return from loans to their companies than they can from these loans through interest payments. This process of increasing the equity and trading aspects of a business through debt is generally referred to as leverage.
While the risk of raising equity is that the original creators may become so vulnerable that they ultimately receive little return for their efforts and success, the main risk of debt is a corporate one – the company must be careful not to get bogged down. and from which he is unable to repay his debt.
Corporate finance is ultimately a juggling act. It must successfully balance ownership aspirations, efficiencies, risks and returns, considering the adjustment of the interests of both internal and external shareholders.
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