Every decision made in a business has financial implications, and any decision that involves the use of money is a corporate financial decision.
Purpose of the firm is to create value for you, the owner and the value of the firm is reflected in your balance sheet. One of the primary goals of financial management is to maximize that value by carefully managing the balance sheet. The basic principles remain the same, whether one looks at large, publicly traded firms or small, privately run businesses. All businesses have to invest their resources wisely, find the right kind and mix of financing to fund investments in projects that increase the firm's long term profitability and sustainability, and return cash to the owners if there are not enough good investments.
Corporate finance while managing the balance sheet is bringing answers to three simple questions:
- In what long-lived assets should the firm invest = capital budgeting
- How can the firm raise cash for the required capital expenditures = capital structure
- How should short term operating cash be managed = net working capital
"Invest in assets and projects that yield a return greater than the minimum acceptable hurdle rate. The hurdle rate should be higher for riskier projects and should reflect the financing mix used—owner’s funds (equity) or borrowed money (debt). Returns on projects should be measured based on cash flows generated and the timing of these cash flows; they should also consider both positive and negative side effects of these projects." The Investment Principle