Corporate Finance World

Corporate finance has many parallels in personal finance. There are long-term and short-term goals. There are objectives to pursue and decisions to be made about how to pursue those objectives. As with our personal lives, decisions must be made as to how much risk to assume and how to mitigate those risks.

We have immediate objectives, housing, food, transportation, supplies. So does a corporation. There must be sufficient cash flow to keep the business in operation.

We have long-term objectives—owning our own home, retirement. The corporation has long-term objectives—staying viable, profitable, and investing those profits into capital investments that provide a healthy return. If the corporation is publicly traded, they must stay attractive enough to keep buyers interested in their stock.

There are long-term decisions to be made; whether to sink profit into capital investment or issue dividends to stockholders; whether to finance expansion or infrastructure or use profits. As a corporation grows, the corporate investments do, too, and they are handled much like a personal portfolio, depending on the objectives of the company. Risk of investment is assessed and the risk is spread between exciting prospects of either immense success—or disaster, and steady, modest growth. Depending on the needs of the individual, or the corporation, someone has to make those decisions and assign the proportions. If the riskier investment goes belly-up, the steadier investment cushions the blow. If the riskier investment turns to gold, there is more profit to enhance the value of the corporation.

Much is dependent on the perceived character of both the individual and the corporation. Individuals are deemed credit-worthy by their credit rating and FICO score, a corporation is rated by Weiss, Fitch, A.M. Best, and others. The rating not only determines the rates at which the corporation can borrow money, it also affects the perceived desirability of the company for potential investors/stockholders. It is the responsibility of the corporate finance officers to keep the corporation not only profitable and accountable, but also as viable as possible.

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