FINANCIAL ANALYSIS : What is corporate finance?
- FINANCIAL ANALYSIS
- INVESTORS AND MARKETS
- CAPITAL STRUCTURE POLICIES
- FINANCIAL MANAGEMENT
Financial managers (or CFOs) are evolving in an environment that is undergoing irreversible change due to the rise in environmental, social and governance (ESG) concerns within society. This change is naturally and durably affecting corporate finance, slowly in some aspects, much more rapidly in others.
It has led to a growing number of investors to define ESG criteria leading to the exclusion from their portfolios or underweighting of companies that do not comply with them. This pushes companies to take these criteria into account, and to finance through new tools, such as green or socially responsible bonds, investments aimed at better complying with ESG criteria. In the long run, a company that chooses to ignore ESG concerns would be doomed to disappear under the double effect of a higher cost of financing and difficulties in attracting talent.
The financial manager has three main roles:
To ensure the company has enough funds to finance its expansion and meet its obli- gations. To do this, the company issues securities (equity and debt) and the financial manager sells them to financial investors at the highest possible price. In today’s capi- tal market economy, the role of the financial manager is less a buyer of funds, with an objective to minimise cost, and more a seller of financial securities. By emphasising the financial security, we focus on its value, which combines the notions of return and risk. We thereby de-emphasise the importance of minimising the cost of financial resources, because this approach ignores the risk factor. Casting the financial manager in the role of salesperson also underlines the marketing aspect of the job, which is far from theo- retical. Financial managers have customers (investors) who must be convinced to buy the securities the company issues. The better they understand their customers’ needs, the more successful they will be.
To ensure the sustainability of the company in three areas: profitability, risks and com- pliance with ESG commitments made. The financial manager ensures that, in the medium term, the company generates a rate of return on the resources entrusted to it by the investors at least equal to the rate of return required by the latter. If this is the case, the company will create value. Otherwise, it will destroy value, leading investors, if it continues to do so, to withhold funds from it and cause the value of its securities to fall, leading to a change in management or bankruptcy. In terms of risks, the financialmanager must identify and manage the company’s risks so that the company’s opera- tional performance is not jeopardised by financial risks! Finally, the financial manager guarantees the company’s compliance with the ESG commitments the company has made to the investors who finance it.
The financial manager is also a strategist who can be led to question the scope of the company’s activities.