Understanding the core principles of corporate finance

There are two reasons why a company is successful.

The first one is obvious — when a business earns an outstanding profit caused by a large amount of sales.

The second one is a bit more subtle but equally important.

You see, a thriving organisation will always have a strong corporate finance team working behind the scenes to ensure all financial affairs are in order.

This means proper budgeting of projects, recording of expenses and revenue, optimised cash flow and, more importantly, happy investors.

Corporate finance is responsible for the fiscal health of any company. Finance professionals working in this field are trained to improve operations and maximise the growth potential of a company. They use financial analysis, market research and quantitive methods to help businesses make informed decisions.

If this sounds like the perfect job for you, great! Corporate finance offers a great opportunity for finance aspirants hoping to make a mark in this industry. However, you need the expertise and technical knowledge to excel in this field. To get you started, let’s learn about five important corporate finance principles first.

5 core principles of corporate finance

1. Time value of money principle

This is one of the most vital corporate finance principles. It essentially states that the money you have right now is worth more than the money you will have in the future.

Why is this so important? Because it means that to make more money, you need to start investing right now. You can lose money by waiting, as it leads to missed opportunities.

Once you understand this concept, you can analyse and evaluate investment prospects according to how good the timing is. There are calculation techniques that calculate the value of an investment today and compare it to a future investment.

The time value money principle ensures you make educated decisions and manage resources wisely to increase profitability.

2. Capital budgeting principle

An organisation needs an efficient corporate finance team to care for long-term capital assets. Capital budgeting is one of the corporate finance principles that ensure the creation of a financial plan for investments. Professionals use financial analysis and financial modelling to examine available funds from successful projects and ascertain whether they would suit potential investments. Capital budgeting in corporate finance also involves evaluating and analysing several prospects to identify the best viable option for the company.

3. Capital structure principle

Corporate finance professionals use their financial acumen to seek out the best capital structure for the business. As one of the essential corporate finance principles, it can directly impact the company’s financial performance.

So, what is this principle all about? Capital structure relates to the different sources of funds, such as debt and equity. A corporate finance expert will examine various parameters such as risk factors, profits and market trends to determine the best financing option for the company.

When you understand the capital structure principle, you can make the best choice for the business and receive funding with minimal risk.

Also Read – 6 Reasons Why Corporate Finance is Key to Business Success

4. Risk and return principle

There is always risk in finance. Although sometimes big risks can lead to great rewards, there is no guarantee. It is a delicate balance to work out the perfect risk-reward dynamic. How much of a risk should you take? And how likely is a good return? Corporate finance professionals take on the job of assessing and analysing various potential investment and financial decisions to decide the perfect risk-return ratio. It is their responsibility to mitigate any likely financial disasters. One of the best ways to do this is to diversify investments through various assets and securities. By using calculation methods, professionals can make informed decisions about the best investment options that come with a low-risk threat.

Risk and return is one of the corporate finance principles that lowers the gamble on investments and tries to enable a healthy profit for the company.

5. Financial statement analysis principle

One of the most vital corporate finance principles, financial statement analysis is a tool all finance experts swear by. It is used to better understand company performance and productivity. This principle uses various financial ratios, such as liquidity ratio and solvency ratio, to create a clear picture of a company’s financial condition.

Corporate finance experts also look for irregularities and concerns by examining balance sheets, cash flow statements and income statements. Financial statement analysis helps to track any financial operations in the company, such as revenue, expenses, investment and even possible risks.

6. Reinvestments and dividend principle

What does a company do with profits or any surplus of funds? When investments prove successful, leading to a windfall of capital, corporate finance professionals have to figure out the best options for this new income. Experts follow one of the primary corporate finance principles when figuring out how to reinvest the profits.

One option is to look at several new investment opportunities in the hopes of earning an even higher return. Another alternative is to use the money to pay dividends to shareholders. It can also be invested within the company to enhance operations or optimise productivity.

But which one to choose? Only corporate finance experts can decide once they analyse the information, study the data and arrive at a sound decision.

Also Read – Skills Required for a Corporate Finance Professional

Benefits of working in corporate finance

When applying for jobs, many financial students opt for corporate finance. Why is that? There are many advantages to working in this field, such as:

• There are multiple exciting job profiles within corporate finance, such as corporate finance analyst, management accountant, cost analyst, treasurer, etc.
• There is immense opportunity for growth within the field.
• Many CFOs have gotten their first break in corporate finance.
• The job comes with attractive salary packages, incentives and a good work-life balance.
• It is a highly relevant field that won’t become obsolete anytime soon.
• Corporate finance is a very stable and safe sector.

How Proschool is best for a corporate finance career

Your best bet to getting into corporate finance? Choose the right qualifications. Proschool offers some of the best finance programs, such as CFA, ACCA, Investment Banking Operations and financial modelling. These courses are perfectly designed to give you a well-rounded education in finance. You learn about relevant concepts, in-depth knowledge of industry-centric skills and important theories such as corporate finance principles. Your training with Proschool prepares you for the challenging and complex world of corporate finance. Your professors are top specialists from the field, who share their expertise and wisdom with the students. At Proschool, you receive a practical yet comprehensive learning experience, which can pave the way for a successful future in corporate finance.

Courses offered at Proschool:

1. CFA — one of the world’s best finance certifications with a power-packed syllabus that includes subjects like quantitative methods, equity investments, financial statement analysis and economics.
2. ACCA — An excellent accounting course that is perfect for management accountants in corporate finance.
3. Investment Banking Operations — offers a perfect foundation in finance with subjects like equity research, financial modelling, mergers & acquisitions and corporate finance.
4. Financial modelling — Learn how to use spreadsheet software to create models that collect, analyse and sort financial data.

Benefits of learning with Proschool:

1. The professors use innovative learning methods and training techniques to help students grasp the topics.
2. The faculty also offers personalised attention and moral support to students who need it.
3. You can attend coaching centres in major cities across India or enrol for online classes.
4. Additional learning resources such as mock tests, practice papers, prep books and customised study plans are also available.
5. Students receive recruitment-based training to help them with job interviews.
6. Once you are certified, you can access the Proschool placement portal for job openings in corporate finance.

FAQs

• Is there much career scope in corporate finance?

Yes, there is. Corporate finance is one of the most secure and lucrative careers in finance. There are a lot of responsibilities involved, such as strategic planning, financial analysis and forecasting. You will be in a prominent position with plenty of scope to rise to leadership positions.

• What is the main focus of corporate finance?

Corporate finance is a specialised field that deals with financial decisions regarding budgeting, project funding, investing and accounting.

• What are the qualifications needed to become a corporate finance specialist?

Most professionals get certified in a finance course such as MBA or CA. The CFA course is preferred by many companies as it gives candidates an edge over their peers. Programs like the ACCA and financial modelling are also relevant to the field, as they teach much-needed knowledge and tools. Investment Banking Operations is another stellar course with a strong syllabus that includes corporate banking principles.

• What skills do I need to work in corporate finance?

You need to possess most of the following skills to succeed in corporate finance:

• Problem-solving and analytical thinking
• Research skills
• Knowledge of financial analysis, quantitative methods, financial modelling and corporate finance principles.
• Interpersonal skills
• Industry awareness
• Attention to detail
• Mathematics and basic calculation skills

Conclusion

Every company needs a corporate finance team to manage their funds, investments and accounting efficiently. Professional courses such as the CFA can help you master financial concepts and skills, such as the core corporate finance principles. Companies want professionals who understand the finance business and make solid decisions. If you think you have what it takes to succeed, enrol yourself in a finance course today.