The Fundamentals of Corporate Finance

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The following is a guest post. Enjoy! 

Corporate finance is the broad category of the area of finances that deals with the money decisions that businesses must make, and the tools used to make these decisions.   Unlike personal finance, where the goal is to maximize personal wealth, the goal of corporate finance is to maximize shareholder value.  

Here are some basic fundamentals of corporate finance that almost all companies, from small businesses to Fortune 500 companies, do on a regular basis. 

Short Term Decisions

Just like people, companies have to make money decisions everyday.  For example, retailers have to make sure that they money they take in at the cash register is deposited into the bank, and that the money is safe for the company to use.  They also have to consider the taxes they must pay on the money, and make payroll for their employees each week.
For the most part, short term decisions involve balancing the current assets (i.e. incoming cash flow and receipts) with current liabilities (i.e. payments owed).  In general, this involves managing cash, inventories, short-term borrowing, and lending (i.e. providing credit to customers).

Long Term Planning

Corporate finance also involves a lot of long-term planning as well.  The biggest aspects of long term planning are around capital investment decisions.  These are the choices that CEOs and other leadership have to make for the company.  For example, they have to decide which corporate projects receive investment (i.e. if you were Apple, do you fund a desktop computer or research the iPad).
Company leadership also has to decide whether they are going to fund projects with equity or debt.  This means issues shares and becoming publicly traded, or by finding a lender, like a bank, who will loan money to the company.
Finally, leadership has to decide whether to pay dividends to shareholders.  Warren Buffett refers to this decision as whether company leadership thinks that they can do better with the money they have, or if they think their shareholders can do better on their own – it basically speaks a lot to the company’s future potential.

How about you all? Have you had to deal much with corporate finances in your day-to-day job? What are the main differences you see in it vs. personal finance?

Share your experiences by commenting below!

***Photo courtesy of http://www.flickr.com/photos/ell-r-brown/3854320166/sizes/l/in/photostream/

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