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General Overview of Corporate Finance

Corporate finance can be divided into equity financing and debt financing, and cash flow financing using the company’s income as source. The different forms of capital investment are further discussed in chapters [Equity Financing]⁠ and [Debt Financing]⁠. Mezzanine financing, which is used to describe hybrids between equity and debt financing, is further discussed in a separate chapter [Mezzanine Financing]. ⁠Finally, cash flow financing refers to capital generated through the company’s business operations, which has not been distributed to shareholders.

In particular, as a company grows the financing needs but also the available financing alternatives tend to expand. There are several ways to finance a company’s operations, and it is advisable to consider the availability of different types of financing well in advance of actualization of the financing needs. Advance planning of financing facilitates the company’s operations, and enables the company to prepare for future challenges. Principal areas of a company’s finance plan include:

  • investment planning

  • working capital (operating capital) planning

  • cash flow forecasts

  • equity financing planning

  • accounting and tax planning relating to cash flow financing and external financing.

Within a company, the corporate finance department ensures, for its part, that the company’s business decisions can be carried out smoothly, and supports, through its decisions, the company’s profitability. Even if a finance plan had been diligently prepared, it may not be realized as planned. Therefore, an essential part of corporate finance is preparing for unexpected events. The tasks of the corporate finance function can, for instance, be divided as follows:

  • to ensure realization of cash flow financing (business profitability);

  • to acquire financing for investments (target-oriented capital structure, debt management);

  • solvency management (target areas: payment transactions, liquidity reserves, return on investments and risk management);

  • to ensure return on excess funds.

The financing alternatives available for companies have developed rapidly, and there are increasingly complex financial instruments available. The risk, cost and security required for different forms of financing vary considerably.

The management of a limited liability company is responsible for corporate financing and finance planning. Accordingly, one of the management’s tasks is to develop and maintain a capital and financing structure that fits the company's needs. The financing risk can be determined by calculating the debt-to-equity ratio. However, in situations where return on capital exceeds the cost of debt, profitability will improve when the debt-to equity ratio and, consequently, the financing risk increases (so-called debt leverage).

There are a number of key figures that can be used for monitoring the financial position of a company. Profitability can be measured, inter alia, through return on equity, operating profit/loss and EBITDA (earnings before taxes, depreciations and amortizations). For purposes of a company’s financial position, it is also important to monitor the key figures relating to solidity, such as the debt-to-equity ratio, amount of interest-bearing debt, and debt matur1ity.