Question

Discuss the importance of corporate finance.

Answer 1

In any business enterprise, the important functional areas are production, finance, marketing and personnel activities. Out of these, financial activities are given the utmost importance. The importance of Corporate Finance is as follows:

1. Helps in Decision-making: 

1. Availability of funds is an important factor that influences major business decisions. 
2. It is difficult to perform any function of business enterprise without finance.
3. Impact on profitability is an important factor that influences business decision making.
4. Out of the various alternatives available to the business, the management is required to select the best one that will ensure maximum profitability.
5. Business organisation will undertake a project only if it is financially viable. 
6. Thus, Corporate Finance plays a very important role in the decision-making process.

2. Helps in Raising Capital for a Project:

A business firm needs finance to start a new venture. There are various sources for a business firm to raise funds like issue of shares, debentures, bonds or even taking loans from the banks. 

3. Helps in Research and Development:

1. Research and Development is important for the growth and expansion of a business.
2. Detailed technical work is essential for the execution of projects.
3. Funds have to be made available throughout the lengthy process of Research and Development. This would require continuous financial support. 
4. Also, a company may need to improve its old product or develop a new product in order to attract its customers.
5. In order to do this, company has to conduct survey, market analysis etc. which again requires financial support.

4. Helps in Smooth Running of Business Rrm:

A smooth flow of Corporate Finance ensures that the salaries of employees are paid on time, loans are cleared on time, raw materials are purchased as per requirement, sales promotion is carried out smoothly and products can be launched effectively. 

5. Promotes Expansion and Diversification:

1. Modern machines and techniques are required for the expansion and diversification of a business. 
2. Corporate Finance ensures that funds are available to purchase modern machines and techniques. 
3. Hence, finance becomes mandatory for the expansion and diversification of a company. 

6. Payment of Dividend and Interest:

Finance is required to pay dividend to shareholders, interest to creditors, banks etc. 

7. Payment of Taxes/Fees

A company has to pay various taxes and fees to government like income tax, Goods and Services Tax (GST), fees to Registrar of Companies etc on various occasions. Finance is needed to pay these taxes and fees. 

8. Bring Co-ordination between various Activities:

Corporate Finance plays a very significant role in the in control and co-ordination of various business activities E.g.: if finance department does not provide adequate finance for the purchase of raw materials and to meet other day-to-day financial requirements for the smooth running of the production department, it will affect the production activities. As a result, the sales may suffer and which in turn will adversely affect the income and profits of the business. Thus, efficiency of every department in a business depends upon the effective financial management. 

9. Managing Risk:

A company has to manage various financial risks like loss due to sudden falls in sales, losses due to natural calamities, losses due to strikes etc. In order to manage such risks, a company needs financial help. 

10. Replace Old Assets:

The assets of the company like plant and machinery become old and outdated over the years. The company needs to replace them with new assets over a period of time. Finance is required for the purchase of new assets.