Whether your business is a small startup or a large publicly traded company, the role of corporate finance is indispensable. Managing finances appropriately is the difference between growing a company and going bankrupt.
Here’s exactly what corporate finance is, what CFOs do, and details on the relationship between CEO and CFO.
What Is The Role Of Corporate Finance?
Corporate finance is responsible for a company’s financial health and growth. Financial leadership handles all aspects of finance, including increasing a business’s value, generating a return on investment, finding funding sources, and generating financial reports.
What Are The Three Main Areas Of Corporate Finance?
Corporate finance is split into three sub-sections: capital budgeting, capital structure, and working capital management.
Capital budgeting operates over the long term. It involves deciding which money-making areas of a business should receive funding and in what quantity.
Capital structure determines how a company gets the long-term financing it needs. This can be debt, equity, or internal revenue (more on this later).
Working capital management involves overseeing and managing a company’s funds in the short-term, from short-term borrowing to inventories and everything in between. Think of working capital as a company’s “credit card” where it covers near-term expenses and typically pays it off quicker than other tranches of debt.
Note that one can also use corporate finance in the context of investment banking, but in this case, the term refers to executive-level financial management.
The Goal of Corporate Finance
The outcome of corporate finance is two-fold: grow revenue and increase shareholder value. It’s up to the CFO to determine how best to allocate funds between these two primary goals.
Increasing shareholder value occurs when a company grows and its profits increase, so the two goals are closely intertwined.
What Does Corporate Finance Entail?
The role of a treasurer is to manage an organization’s current financial standing. Thus, corporate finance involves determining how to invest the business’s cash in a way that grows the business and mitigates risk.
Additionally, CFOs determine a company’s capital structure. It’s up to them to determine what percentage of capital each of the following categories absorbs. Let’s break this down into three main components:
- Debt: borrowed funds that allow a company to sustain its business or grow into the future. Debt can come in the form of bank loans, bonds, notes payable, and more.
- Equity: Remember the shareholders? Those individuals have equity in a company. They buy shares in exchange for future payouts.
- Internal financing: Companies can also acquire capital internally, including selling assets, generating profits, and reducing working capital.
In conjunction with the financial planning and analysis (FP&A) team, finance executives look to earn the highest return on capital that they can. This determines a company’s profitability, the most critical metric of financial success for most businesses.
The FP&A team compares results to what was anticipated to ensure the organization stays on track and generates the ROI it needs.
Corporate finance involves loads of reporting, with the controller responsible for keeping the CFO accountable. Financial executives present historical financial information to the company and its decision-makers; if that information were inaccurate, it could cause serious harm since so many decisions are based on the presented numbers.
Strategizing For The Future
While CFOs also look backward to make sure what they forecasted produced the expected results, corporate finance is future-driven. Financial leadership must use current information and expectations about the future to determine how the company can make the most of its funds.
For instance, the CFO of a major restaurant chain must strategize menu selections, locations, advertising budgets, and more based on the most efficient areas of the chain. This information is used to improve its economic future.
Related: All About The Financial Executive Role And Why It Matters
CEO vs CFO: How Do The Two Work Together?
The power of the CFO-CEO relationship can’t be understated. To grow a business effectively and to the highest degree, the CFO must have a close working relationship with the CEO.
Surprisingly, only 49% of over 100 CFOs at top US companies surveyed stated they had a “very strong relationship with their CEOs.” However, 98% of CFOs with “very strong CEO relationships” can have difficult discussions with their company leaders. These challenging discussions are imperative if you want to get ahead of issues and correct the most disruptive ones.
The CEO and CFO work together in a few ways, including:
- Growing the company. CEOs are almost always looking towards the future, where CFOs balance their time looking both backward and forward.
- Determining monetary allocation. CEOs and CFOs put their heads together to make sure cash goes to the right places, and the business grows.
- CEOs focus more on sales, marketing, strategy, and overall business growth, and the CFO is responsible for making sure the company’s finances can match the CEO’s vision. They’re also responsible for checking the CEO if they feel the vision isn’t rooted enough in reality.
What CEOs Should Expect From CFOs
As the CEO, you should expect the following from your financial leader:
- Offset cost. The CFO should return far more to the company than what they are paid.
- Delivering business results. Corporate finance means driving a company forward, not simply serving as a bean counter.
- United presentation. A rift between CFO and CEO can rattle the entire organization and upset the shareholders. Even if they disagree in private, the CEO and CFO need to resolve their differences before addressing anyone else.
- Effort. CFOs need to value their relationship with the CEO and work hard to get along. However, note that this is a two-way street, and CEOs must likewise put in that effort. Two mismatched personalities who’d rather not interact won’t grow the business effectively, if at all.
- Brutal honesty. This is predicated on a solid relationship, but CEOs should expect CFOs to hold nothing back. If the company faces dire straights, the CFO needs to tell their leader about it, and their leader should listen.
Can You Be Both CEO and CFO?
While many small companies and startups have one leader that handles most, if not all, c-suite tasks, no company can do that forever if it wants to succeed.
CFOs need a few traits to succeed, including:
- Analytical skills
- Logical thinking
- Financial expertise
CEOs need those skills, too, along with some others:
- Emotional intelligence
- Effective communication
- Servant leadership
- …and more
When comparing the duties of the CEO vs CFO, they overlap in some ways; however, overall, the roles are highly distinct. Both positions are also highly involved, so a person only has time for one if he or she wants to do an outstanding job.
For your company to succeed, you need a winning corporate finance leader. Jennings Executive has over two decades’ experience recruiting the best CFOs for businesses that want results. Learn more about us today!