Function

• Corporate finance analysis serves two purposes: appraising business performance and detecting liquidity needs. Corporate finance employees assess business performance by reviewing a firm's financial statements, comparing current and historical data and detecting key "business indicators" and industry trends (an example of "business indicator" is profit margin). These employees also analyze a company's "capital structure" and "working capital" ratios to gauge funding requirements for operating activities. "Capital structure" indicates various sources of funds an organization uses to finance operations (e.g., stocks, bonds, loans or internal funds). "Working capital" is a measure of short-term cash availability and equals current assets minus current liabilities.
  
  

Significance

• Company finance is important in modern economies because most firms require external funding to pay for short-term obligations such as salaries and interest payments. Even profitable companies experience temporary cash shortages because customers typically do not pay for goods on delivery. Company finance also helps financial market participants (e.g. banks or traders) because it brings commission revenues and fees but also allows trading of financial products that a firm issues.
  
  

Types

• A corporation may raise funds by selling shares of equity (stocks) or debt (bonds) on securities exchanges and receiving immediate cash. Buyers of equity shares (stockholders) receive periodic dividends and gain when share prices increase. They also hold voting rights and may attend annual shareholders' meetings. Bondholders receive regular interest payments and initial loan amounts at maturity. A firm also may apply for a bank loan, an overdraft agreement or a line of credit.
  
  

Expert Insight

• Company finance often involves statistical and mathematical factors that only specialists may help decipher. If a firm does not have skilled employees in a particular field, it may hire a consultant to review operating data and recommend improvements in processes. For example, a Teaneck, N.J.-based university endowment fund might hire a chartered financial analyst (CFA) to review the fund's capital structure ratios and suggest new calculation tools.
  
  

Misconceptions

• Company finance analysis is a business activity but it may help non-profit organizations or governmental agencies evaluate operating data and assess liquidity needs. For example, the city of New York may seek short-term financing for after-school programs by issuing (selling) $500 million in municipal bonds on the New York Stock Exchange and London Stock Exchange. Similarly, an autism-research organization may apply for a bank overdraft to fund an upcoming campaign.