10 Importance of Corporate Finance – Scholarszilla
Table of Contents
Importance of Corporate Finance
Meaning of Corporate Finance
Corporate finance deals with the raising and using of finance by a corporation. It deals with financing the activities of the corporation, capital structuring, and making investment decisions.
Definition of Corporate Finance
Henry Hoagland expresses the view that ‘‘corporate finance deals primarily with the acquisition and use of capital by a business corporation.’’
The term corporate finance also includes financial planning, the study of capital market, money market, and share market. It also covers capital formation and foreign capital. Even financial organizations and banks play a vital role in corporate financing.
Importance of Corporate Finance
1) Helps in decision making
Most of the important decisions of business enterprises are determined on the basis of the availability of funds. It is difficult to perform any function of a business enterprise independently without finance. Every decision in the business is needed to be taken keeping in view of its impact on profitability.
2) Helps in raising capital for a project
Whenever a business firm wants to start a new venture, it needs to raise capital. A business firm can raise funds by issuing shares, debentures, bonds or even by taking loans from the banks.
3) Helps in Research and Development
Research and Development must be undertaken for the growth and expansion of business. Detailed technical work is essential for the execution of projects. Research and Development is a lengthy process and therefore funds have to be made available throughout the research work. This would require continuous financial support.
4) Helps in smooth running of business firm
A smooth flow of corporate finance is needed so that salaries of employees are paid on time, loans are cleared on time, raw material is purchased whenever required, sales promotion of existing products is carried out smoothly and new products can be launched effectively.
5) Brings co-ordination between various activities
Corporate finance plays a significant role in control and coordination of all activities in an organization. For e.g. Production will suffer if the finance department does not provide adequate finance for the purchase of raw materials and meeting other day-to-day financial requirements for smooth running of production unit. Due to this, sales will also suffer and consequently, the income of concern, as well as the rate of profit, will be affected. Thus the efficiency of every department depends upon effective financial management.
6) Promotes expansion and diversification
Modern machines and modern techniques are required for expansion and diversification. Corporate finance provides money to purchase modern machines and technologies. Therefore finance becomes mandatory for expansion and diversification of a company.
7) Managing Risk
Company has to manage several risks, such as sudden fall in sales, loss due to natural calamity, loss due to strikes, etc. The company needs financial aid to manage such risks.
8) Replace old assets
Assets such as plants and machinery have become old and outdated over the years. They have to be replaced by new assets. Finance is required to purchase new assets.
9) Payment of dividend and interest
Finance is needed to pay dividends to shareholders, interest to creditors, banks, etc.
10) Payment of taxes/fees
The company has to pay taxes to the Government such as Income Tax, Goods and Service Tax (GST), and fees to the Registrar of Companies on various occasions. Finance is needed for paying these taxes and fees.
