Corporate finance defines the financial aspect of a company and involves making decisions relating to funding, investment sources like debt or equity and drawing analysis of financial project overall in terms of profitability and costs. In simple words, corporate finance is managing the financial activities of a company.
On the other hand, investment banking refers to financial activities like raising finance for companies through security operations in debt and equity markets. Other activities they are involved in is executing mergers and acquisitions, and offering advisory services to large clients and perform complex financial analyses.
A corporate financer deals with all the financial activities from day-to-day financial operations to handling long- and short-term business goals. However, investment banker focuses on raising capital, sell shares or bonds and conduct M&A deals.
It can be a bit challenging to differentiate corporate finance and investment banking as investment banking is, in a way counterpart of corporate finance.
What is Corporate Finance?
Corporate finance can be defined as the financial structure of a company which involves dealing in various elements of the entity like management actions and funding resources. It helps us by guiding us in taking the required measures to increase a firm’s value and goodwill.
The main aim of corporate finance is to grow the value of an entity and the value of shareholders. Corporate finance focuses on three main sectors of a firm – capital structure, capital budgeting and working capital management.
Capital structure: This refers to the composition of a firm’s debt and equity. The capital structure of a business firm is substantially on the right side of the balance sheet.
Capital budgeting: It is a process that businesses implement to evaluate which proposed fixed asset purchases should be accepted, and which shouldn’t be accepted.
Working capital management: This refers to managing sufficient balance between a company’s current assets and liabilities.
What is Investment Banking?
Investment banking is a distinct division of banking, which offers services for individuals and organisations in raising funds through securities. An investment banker acts as a conciliator between the public or organisations and companies which issues securities to the public.
Investment banking underwrites new debt and equity securities for all the companies, aid in the sale of securities, and broker trades for both private investors and institutions.
CORPORATE FINANCE V/S INVESTMENT BANKING
Primarily, corporate finance is concerned with the financial dealings of a corporation by balancing the debt and equity ratio. An increase in debt also increases the risk while relying too much on equity can dilute the earnings and value for initial investors. Another responsibility is to ensure that there is enough liquidity or funds to run day-to-day operations. Furthermore, it may also engage in getting additional credit lines or issuing commercial papers as liquidity backups.
Corporate finance is much broader in scope, and investment banking is a counterpart of corporate finance.
Investment banking deals with financial decisions like issuing securities, acquiring businesses and raising capital to run business. Investment bankers have specialised approach and expert knowledge on the part of the professionals.
Despite being a sub-area of corporate finance, yet investment banking qualifies as a distinct field, and investment bankers are recognised as heavyweights for the type of roles they conduct.
To make it understandable and straightforward below are differences based on the concepts of Corporate Finance and Investment Banking.
Key Differences
Corporate finance helps in the financial management of a corporation, and investment banking helps a corporation to grow by raising capital.
The purpose of corporate financing is to help an organization in maximizing its value and goodwill by taking strategic financial decisions. And the purpose of an investment banker is to let the other companies raise their share capital by issuing securities, mergers and acquisitions and other such measures.
Former is used to determine the financial statements of one’s own company whereas the latter is used to determine the financial statements of other companies. Simply saying, in corporate finance, it is concerned with the financial operations of one’s own firm by making essential decisions of investment making and capital raising whereas, investment banking is concerned with the financial transactions of other companies to raise capital for themselves.
A corporate financing analyst needs to prepare financial reports, whereas an investment banking analyst prepares pitch books and memorandums for other companies.
The role of a corporate financer is levied with the responsibility of making tax returns and offering tax advisory services for the company. While the role of an investment banker is levied with the duty of providing advisory services to other companies.
Your idea is to plan and make use of procedures to ensure that the value creation works effectively and efficiently. Hence, capital investment, as well as investment banking, are component concerning the scope of corporate finance and investment banking.
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