Corporate financial strategy is a way to complement business strategy, to get the most long-term value out of a company. It is about how organisations raise funds, and how they apply them.
In raising funds, the broad choices you have are borrowing, debt, or raising money from shareholders, equity. In corporate finance we know that, rather counter-intuitively:
- borrowing debt counts as cheap funding
- equity is rather expensive but less risky
So if you wanted to raise money at absolutely the lowest cost, you’d just borrow. But of course, that would make the company hugely risky, so you need a base of equity underneath that – equity is more expensive, but a lot safer for the organisation.
One of the decisions in corporate financial strategy is where we set the parameters – how much debt, how much equity, and what are the consequences? We make those choices based on the riskiness of the business, and the preferences of the shareholders.
Our work in this area at Cranfield is one of the areas explored within the Finance for the Boardroom programme - one of our specialist programmes designed to develop appropriate skills for non-financial professionals and frameworks to successfully improve financial performance and shareholder value in your organisation.
Blog produced by: Professor Ruth Bender, Emeritus Professor of Corporate Financial Strategy and Programme Director of Finance for the Boardroom, Cranfield School of Management