Fundamentals of Corporate Finance and Accounting and Audit

The most basic component to run a business is Corporate finance. Apart from skills and ideas, what else would you think is required to start a business? It’s quite simple, you need money. Any economic activity requires finance, whether big or small. You can raise funds through various sources like borrowing from friends, family, personal savings, etc. This same concept applies to corporations. The business has some decisions that involve the use of money and has financial consequences. These decisions are called corporate finance decisions. Corporate finance is one of the most important parts of the finance domain. Corporate finance raises and deploys capital in order to grow and survive whether the organization is big or small. Corporate finance plays various roles that are very challenging and interesting. A financial adviser is one of the main roles played by corporate finance. A corporate-financier works for a company to aid them to find sources through which funds could be raised, plan the future course of actions, expand the business, ensure sound profitability, and economic viability, and manage money.

Accounting

Accounting involves the process of recording financial transactions pertaining to a business. Business accounting services include analyzing, summarizing, and reporting these transactions to oversight regulators, agencies, and tax collection entities.

Auditing

Auditing is part of accounting. Auditing is an examination of financial records and accounting. This is done to know whether a business undertaking has generally accepted accounting principles and has conformed its operations to the laws. To enhance confidence in financial statements an auditor is required to examine the financial statements. A financial statement audit service strengthens operations and maximizes value. A financial statement audit service helps to build and advance credibility and confidence by obtaining the highest level of assurance regarding your financial statements.

Principles of Corporate Finance

There are three most fundamental principles in corporate finance -

Investment Principle-

This principle revolves around a simple concept. This concept includes businesses that have resources that need to be allocated in the most efficient way. The most important decision that needs to be made is encompassing the working capital decisions such as credit days to be allotted to the customers, etc. It also measures the return on a planned investment decision by comparing it to the minimum tolerable hurdle rate and then decides if the investment is feasible to be undertaken.

Financing Principle-

The corporate financier makes sure that the business has the right amount of capital and the right mix of debt, equity, and other financial instruments. By studying the conditions where the optimal financing mix minimizes the acceptable hurdle rate, the optimal mix can be determined. Then we need to determine the effects on firm value due to the change in the capital structure. After defining the optimal financing mix, next, we need to find out whether it would be short or long-term financing. Then we include other considerations like taxes, etc.

Dividend Principles-

In this, we consider that the company needs to find out the ways of rewarding the owners. So, the excess cash should be given away to the owners/investors or should be kept in the business. The company that is openly held has the option of either paying off dividends or buying back stocks.

Fundamentals of Corporate Finance-

Capital Budgeting-

The process of planning expenditures on assets whose cash flow is expected to extend beyond one year is Capital Budgeting. Projects are studied by the managers and then they decide which ones to include in the capital budget.

• Long-term assets are referred to as capital.
• The plan which details projected cash inflows and outflows during the future period is the Budget.

Time Value of Money

“ A dollar today is worth more than a dollar tomorrow”

This statement concludes that if you have a dollar today, you can earn interest on that dollar and have more than a dollar next year.

Annuity

A regularly made bunch of structured payments or equal payments, like every month or every year.

Perpetuity

It is a special kind of annuity that has an infinite number of cash flows. That is, an annuity that never ends!

Cost of Capital

The most important factor of production is the capital. The capital suppliers require a return on their money and a firm must ensure that those that have lent money to the firm such as banks or stockholders, receive the return they seek. In order to be acceptable, the return from the project must be superior to the cost of the project.

Working Capital Management

It involves the relationship between a firm’s short-term assets and its short-term liabilities. Its aim is to ensure that a firm is able to continue its operations and has adequate ability to satisfy both maturing short-term debt and upcoming operational expenses.

Measures of Leverage

The amount of fixed costs a firm has is referred to as Leverage. Greater variability of the firm’s after-tax operating earnings and net income is achieved by greater leverage.