How Does Corporate Finance Differ From Normal Finance

When many people think of corporate finance, they probably think about their own personal finance on steroids.  For example, instead of paying monthly bills like a mortgage, corporations have to make thousands of different payments per day, to hundreds of different companies.  Or instead of just having a saving account, corporations have huge savings accounts to pay all their bills.  While some of that is correct, there are a lot of differences between personal finance accounts and corporate finance accounts.

Deposit Accounts

In personal finance, you may have a checking account and savings account.  You don’t need to worry about too much else unless you’re wealthy.  However, corporations need to worry a bit more about their deposit accounts.  The reason?  Corporations typically have more money in their accounts that the FDIC limit, and as such, must plan their banking need accordingly to make sure that their money is secure.

Cash Management

Cash management isn’t really an issue with individuals – you just need to make sure that you have more than you spend, and maybe stick to your budget.  However, with corporate finance, there could be thousands or millions of transactions taking place per day (think about how many transactions a company like Wal-Mart processes each day, and then add in how much they spend on buying products and paying employees).  There are a lot of transactions taking place, and they need to be processed efficiently and cheaply.

Financing

Finally, most individuals only have a few financing needs in their lives.  They may need a car loan, and a mortgage loan, and most individuals have a few credit cards to pay for unexpected purchases.  And for an individual, all of these are based on your income and credit history.

But the same rules don’t apply for a company.  While they will also have credit needs, such as to buy equipment or finance short term debts until income comes in, they don’t have credit scores.  To get a loan, a company has to have a relationship with a bank and a banker needs to analyzer their accounts.  This corporate finance tactic is very different than personal finance.