What Is Corporate Finance?

Balance Sheet Evaluation

One of the company forms the corporate finance department uses to make its assessments is the balance sheet for the business. By evaluating a company's balance sheet, it can be determined if and how much in dividends the company can pay to its shareholders. Since the balance sheet of a company tells how much the company value is at specific points in time, the corporate finance department uses it as a tool to monitor whether the value of the company is increasing and if it is profitable.

Another tool the corporate finance department uses as a monitoring device is the cash flow of the company. The department uses this tool to determine what the future profits of the business will be. Since the future value of cash is typically more than it is worth today (based on the theory that you can invest the money today to turn it into more for tomorrow), corporate finance uses a valuation model that uses cash flow. This type of valuation and assessment is slightly more accurate than the balance sheet method, but since corporate finance utilizes both systems, it always has a past, current and future handle on how the company is doing.

The corporate finance department also reviews the cash cycle of the company. The cash cycle of a business is the time between when the company manufactures its goods or services and the time it takes to get paid after selling the goods or services. The cash cycle is important to the success of the business because it determines if there is a need to obtain financing (or business loans). Typically, financing is sought if the cash cycle remains the same but sales increase or sales remain the same but the cash cycle increases.

The income of a business is determined by deducting its expenses from its revenues. The corporate finance department continuously monitors the income of the business by keeping track of the revenues, expenses and inventory levels of the business.

The corporate finance area of a company uses a variety of financial ratios to calculate where the company stands and how this standing plays into the decisions made by company executives in order to continuously move the company toward profitability. Not only does the corporate finance department run these ratios to keep moving the company toward its goals, but it also compares how the company measures up against other companies in the industry.