Business finance provides short-term operating cash to companies.
Business finance--or corporate finance--is an economic activity that helps commercial entities and non-profits secure cash for short-term operating needs or long-term investment decisions. An investment banker typically partners with a firm's corporate finance employees to find adequate funding sources based on firm size, financial health and monetary needs.
Purpose
Business finance serves a fundamental economic function by helping borrowers such as companies and governments receive funds from investors--banks, insurance companies or individual bank depositors--to finance operating needs, pay salaries or order goods and services. Corporate finance activities also influence capital markets transactions because traders and other participants may buy, hold or sell products, such as stocks and bonds, that a company issues on a securities exchange. For example, a trader may buy Company XYZ's bonds and resell them for a quick profit.
Function
Business finance employees typically work in a firm's treasury, accounting, tax, investment or corporate finance department. These workers usually have good communication and investment valuation skills. A finance employee also has a four-year college degree or higher in finance or accounting and may be a certified public accountant (CPA) or a chartered financial analyst (CFA). This expert commonly analyzes financial statements and advises management on funding strategies.
Types
Business entities may select funding options from a wide variety of tools and sources. A company management typically chooses a funding source based on market conditions, fund costs (interest expense) and alternative options. An entity may issue stocks, bonds, convertible bonds or preferred shares to investors on a securities exchange. Alternatively, a firm may apply for a private loan, a line of credit or an overdraft agreement with a bank, an insurance company or a hedge fund.
Expert Insight
Business finance tools often include complex calculations and computer algorithms that only experts can decipher. A financial statement analysis methodology may involve statistical evaluation of large volumes of data spanning many years. In this case, a corporation may hire an econometrics professor to help appraise data and recommend investment solutions. An investment banker also may provide advice on corporate funding decisions as well as long-term initiatives such as mergers, acquisitions or joint ventures.
Misconceptions
Organizations that do not have profit motives, such as a governmental agency or a charitable institution, also may use business finance tools to raise cash for operating needs or long-term expansion projects. For example, the U.S. government may raise funds on securities exchanges, such as the New York Stock Exchange, by selling Treasury bonds or notes. Similarly, an after-school program may borrow from a bank to finance summer activities.
