- Posted by: essay
- Category: Free essays
Corporate finance involves the proper financial decision-making process. At this point, it is worth mentioning the fact that the proper decision-making process is impossible, especially in regard to finance, without an in-depth and adequate analysis of the financial position of a company, its competitors, the overall situation in the industry and economy at large. In other words, corporate finance heavily relies on the financial analysis on the ground of which the effective financial decision-making process is possible. In actuality, the financial analysis is crucial for the effective financial decision-making, whereas the financial decision-making defines the overall development of corporate finance and the marketing position of a company (Birchard, 1994). In such a way, the corporate finance is a complex system, which includes the financial analysis, decision-making and carrying out decisions that aim at the maximization of corporate finance. Moreover, it is important to lay emphasis on the fact that corporate finance comprises an integral part of the organizational performance and affects consistently the marketing performance and position of a company in the market.
Business strategy and corporate finance
Taking into consideration the fact that corporate finance comprises an integral part of the organizational performance and influence the decision-making process at the strategic level, it is quite logical to presuppose that corporate finance are inferior to business strategy and other important issues that affect the regular functioning of an organization, such as human resource management, organizational culture and others. However, such a view on corporate finance is erroneous because the role of corporate finance in business strategy and the functioning of companies can hardly be underestimated.
First of all, corporate finance influences consistently the business strategy. Corporate finance tends to increase the corporate value of a company. The rise of the corporate value affects the organizational performance and the position of a company in the market. As a rule, the rise of the corporate value leads to the improvement of the position of a company in the market. At the same time, the rise of corporate value should be backed up with adequate business developments, i.e. manufacturing of certain goods or production of certain services, and so on. In such a way, the corporate value can grow steadily on the ground of the consistent, qualitative improvements in the organizational structure and organizational performance. Often, the rise of corporate value overheads the rise of productivity, for instance. Due to such rise of the corporate value, companies attempt to attract new investments and, thus, improve their position in the market.
On the other hand, the rise of the corporate value can lead to speculations, when the rise of the corporate value is not backed up with the actual improvements, innovations introduced in business, and other changes that back up the rise of corporate value with real or material positive changes within an organization. In such a situation, speculations emerge that may lead to a profound financial crisis and economic recession, which affect not only a single company but the entire economy. In this respect, it is possible to refer to the experience of the US economy, which has suffered recently a profound economic recession caused by the crisis in the housing market of the US. At this point, it is worth mentioning the fact that the crisis in the housing market as well as financial market was provoked by speculations in the housing market. To put it more precisely, the price of houses in the US grew rapidly and consistently, whereas the construction of houses dropped steadily throughout decades (See Graph 1 and Table 1). Many companies developed their business in the housing industry raising their corporate value on the premise that the price of houses will keep growing in the future. In such a way, many companies raised their corporate value, which was not backed up with the construction of new houses to be sold in the market. As a result, the widening gap between galloping prices and a low number of houses constructed led to the enormous speculations, which, in their turn, resulted in the failure of the housing market and many companies that speculated raising their corporate value without constructing new houses (Schueler and Krotter 2008). In fact, the example of the housing market in the US proves the importance of corporate finance in the contemporary business environment. The housing crisis in the US reveals the full extent to which unwise corporate finance policies can be dangerous, if the maximization of the corporate value is not backed up with an effective business strategy and accumulation of material production or production of services. In such a context, even a wise business strategy could not be successful, if companies were inclined to speculations. Moreover, the housing crisis affected all companies, including those that were not involved in speculations in the housing market.
Therefore, it is obvious that corporate finance is crucial for the business strategy and the business strategy cannot be developed independently of corporate finance. The same trend can be traced in regard human resource management, organizational culture, and other issues important for functioning of modern companies. In fact, modern organizations cannot perform successfully without effective and adequate corporate finance which mirrors the actual potential of companies and maximizes their corporate value.