Corporate Finance

Managerial or corporate finance is the task of providing the funds for a corporation's activities. For small business, this is referred to as SME finance. It generally involves balancing risk and profitability, while attempting to maximize an entity's wealth and the value of its stock.

Long term funds are provided by ownership equity and long-term credit, often in the form of bonds. The balance between these forms the company's capital structure. Short-term funding or working capital is mostly provided by banks extending a line of credit.

Another business decision concerning finance is investment, or fund management. An investment is an acquisition of an asset in the hope that it will maintain or increase its value. In investment management -- in choosing a portfolio -- one has to decide what, how much and when to invest. To do this, a company must:

Identify relevant objectives and constraints: institution or individual goals, time horizon, risk aversion and tax considerations;
Identify the appropriate strategy: active v. passive -- hedging strategy
Measure the portfolio performance

Financial management is duplicate with the financial function of the Accounting profession. However, financial accounting is more concerned with the reporting of historical financial information, while the financial decision is directed toward the future of the firm.

Capital

Capital, in the financial sense, is the money which gives the business the power to buy goods to be used in the production of other goods or the offering of a service.

Sources of capital

Long Term - usually above 7 years
- Share Capital
- Mortgage
- Retained Profit
- Venture Capital
- Debenture
- Sale & Leaseback
- Project Finance

Medium Term - usually between 2 and 7 years
- Term Loans
- Leasing
- Hire Purchase

Short Term - usually under 2 years
- Bank Overdraft
- Trade Credit
- Deferred Expenses
- Factoring

Capital market

Long-term funds are bought and sold:
- Shares
- Debentures
- Long-term loans, often with a mortgage bond as security
- Reserve funds
- Euro Bonds

Money market

Financial institutions can use short-term savings to lend out in the form of short-term loans:
- Credit on open account
- Bank overdraft
- Short-term loans
- Bills of exchange
- Factoring of debtors

Borrowed capital

This is capital which the business borrows from institutions or people, and includes debentures:

Redeemable debentures
Irredeemable debentures
Debentures to bearer
Hardcore debentures

Own capital

This is capital that owners of a business (shareholders and partners, for example) provide:

Preference shares/hybrid source of finance
- Ordinary preference shares
- Cumulative preference shares
- Participating preference share
Ordinary shares
Bonus shares
Founders' shares

They have preference over the equity shares.Means the Payment made to the shareholders is done by firstly paying to preference shareholder and than to the equity shareholders.

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Sources of capital