Evolution and Scope of Corporate Finance

2. Evolution and Scope of Corporate Finance

How the subject has evolved. Corporate finance as a distinct area of study has grown alongside the growth of the corporate form of business itself:

1. Traditional phase. In its earliest form, corporate finance was understood narrowly — mainly as the activity of raising funds for a company (issuing shares and debentures) at the time of its formation or expansion. The focus was almost entirely on procurement of capital, with little attention to how that capital was later used.
2. Transitional phase. As companies grew larger and more complex, attention gradually shifted from merely raising funds to also managing funds already raised — working-capital management, credit policy, and the day-to-day financial administration of the running business became equally important.
3. Modern phase. Today, corporate finance is understood in its widest sense: it covers financial planning, sourcing of both long-term and short-term funds, efficient allocation of funds among competing uses inside the business, and financial control, all evaluated against the ultimate objective of maximising the wealth of the company's shareholders. Modern corporate finance also pays close attention to risk — every financing and investment choice is weighed against the risk it carries, not judged on expected return alone.

Scope of corporate finance. The modern scope of corporate finance covers, broadly:

• Determining the total capital requirement of the business — how much money the company needs in total, for both fixed and working capital purposes.
• Determining the capital structure — the right mix of owned funds (share capital, reserves) and borrowed funds (debentures, loans, deposits) the company should raise.
• Sourcing of funds — choosing among shares, debentures, public deposits, loans, and other instruments, and the procedure for raising each.
• Allocation and investment of funds — deciding how much of the funds raised should go into fixed assets (land, buildings, machinery) versus current assets (stock, debtors, cash) needed for day-to-day operations.
• Administration of income (dividend policy) — deciding how much of the profit earned should be distributed to shareholders as dividend and how much should be retained in the business for future growth. …