Corporate Finance is defined as being concerned with the activities that are connected with or participating in management of cash flows in a Business Organization. Based on its theory and practice, it focuses on the best use of capital, while emphasizing on making wise financial decisions which could possibly be producing intended results for the accomplishment of the objective of shareholders, managers and stakeholders.
One of the most important principles of Corporate Finance is laying emphasis on the value of money over time. The standpoint allows situations to consider what could be preferable choice of a person if he is to receive certain amount of money either now or the time yet to come. The latter being eliminated, former would obviously be his choice. The proverb, “A Bird in the hand is worth two in the bush” is befitting at this point, as the cash today is to be valued more financially than it is in the future. Thus, the principle of value of money over time helps managers to take right decisions between cash inflows and outflows allowing them to consider the situations, spending money and earning the return in lieu of it.
Risk factor being associated with uncertainty plays a crucial role in corporate finance. It’s owing to the uncertainty of generating cash in the future, being a decline in the value of money in course of time, investors would have a preferable choice to accept the cash now rather than in the future. The situation may be varied if they are induced with proper compensation for the risk they are willing to sustain with. This gives rise to efficient management of Risk - being regarded as significant function of Corporate Finance.
Corporate Finance is of an abiding importance due to the attributes of its theory and practice. It seeks to maximize the wealth of shareholders while exhausting the possibilities of increasing overall value of a business enterprise. It’s aimed at yielding benefits with efficient allocation of capital by capital budgeting decision making process while evaluating expected return and the risk being concomitant with. It works in the most constructive terms accomplishing the goals of a business house in an unflawed and absolute manner.
K.A.Fareed (Fareed Siddiqui)
BBA; MBA-Finance; M.Phil-Financial Management
Pursuing CMA- USA
MIMC- Individual Member of Institute of Management Consultants of India
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