Finance department is a body of organization of finance that deals with the study of how money or funds are been sourced for in a company or corporation or government and how there capital are being structured (capital structure) in that company. Finance department is for the purpose of making maximization in shareholder values.
Unlike managerial finance that studies how firm’s financial managements are being studied alone, finance department studies the financial management of government and corporations. The main concept of finance department are applicable to the issues affecting finances of all kinds of firms and government. Capital budgeting and working capital are the two main sub discipline in finance department. Capital budgeting discipline is concerned with how criteria are set about value adding assets should have the investment funding and how to use the investment to build the corporations in equity.
Working capital discipline has to do with the management of the corporation monetary funding that term operating balance of current assets and current liabilities. Investment banking is an important term which is associated with corporate finance. Investment banking is the process of evaluating the financial needs of any company and also try to raise capital that can be used to attain those needs.
Thus, the terms finance department work hand in hand with financial management and financial accounting which is the act of reporting the financial information of a corporation while financial management is concerned with how funds and capital are being allocated to the corporation to increase the shareholder value.
READ: Security finance
To achieve the goal of any corporation and government economy, finance department has to be studied in a pattern on how a corporation and government generate funds and revenue for itself. The sourcing for funds or capital to run corporations are generically on capital self-generated by the company or firm from external sources like lending or issuing new debt and equity.
Sources of capital
- Company or firm can borrow money from commercial banks to run the affairs of the corporation.
- By investing. This is called equity capital. The company sells shares or bonds to investors or shareholders. Shareholders buy these bonds and in return the money got is used to finance the corporation. The shareholders believes that there will be upward trend in the company value and in the future get there profit back from the investment made on the company by buying their shares. The reward given to shareholders on shares bought is called dividends.
All corporations aimed at making profit from their investments. Corporate finance aimed at helping the corporation to get rid of any debts to avoid their liabilities being greater than the assets. There are some problems that can be faced by the corporation e.g. financial distress, a corporation goes through financial distress when it does not have money to run the affairs of the corporation again or when the values of the shareholders has reduced. Companies also face the problem of their liabilities being greater than their assets.
The Trade-Off Theory in corporate finance which firms have always to trade-off the tax benefits of debt with the bankruptcy costs of debt when choosing how to distribute the company’s resources. Economists believes in the alternative way of allocation of resources in firms.
The alternative way is the Stewart Myers theory which states that a firm shouldn’t engage in external funding or financing when they still have the internal funding running and shouldn’t get involve in new equity financing while they can still engage in new debt financing at reasonable rates of interest. This theory is known as the pecking order theory. Corporations may depend on borrowed funds as sources of investment to run the operation of their business in progress.
READ: Principal financial
This borrowed funds are called debts and debt comes in different forms; either from banks or bonds issued to the public, it can also be in form of payable notes (notes payable). The corporations are obligated to make regular interest payments on the borrowed funds till the debts elapses the time it should end; at this time, the corporations must pay back in full the obligation (debt).
Debt payments can also be in form of annual instalment payment or with callable bonds that gives the corporation an opportunity to pay back in full whenever they have the interest to pay off the debts. Corporations are allowed to give collateral if they are unable to pay off the debts at the agreed time from the debt sources.