Checksheet The Corporate Financial Management option prepares students for finance careers within companies. It also prepares students for similar jobs within government agencies and nonprofits. Students who desire to entrepreneurs can also benefit from the coursework in this option.
Corporate Finance is a term used to describe the array of finance functions that exist within a company. Finance professionals are found throughout a company, and their goal is to figure out ways to increase the corporation’s profits, as well as ways in which the corporation can reduce its financial risks and improve the return on its capital. Many finance professionals in a corporation report up through the corporation’s Treasurer to the Chief Financial Officer. However, finance professionals are also located throughout a company’s various operating divisions, where they are embedded within the businesses in a variety of functions, as well as within a number of its other corporate headquarters functions. A career in corporate finance is an excellent way to learn how businesses function and, more important, how they make money and generate returns for their shareholders. Corporate finance can also be a pathway to the upper management of companies. Many companies put their new finance employees through formal training programs, which provide new graduates with an excellent transition from the university setting to full-time employment. Other companies also have rotational programs, in which new employees spend their first few years rotating through a variety of business units and roles; these programs are ideal for new graduates, because they get exposed to and have the opportunity to learn about many of the business and functional areas of the company and how they are interrelated. Key skills required in corporate finance include analytical skills, communication skills (written and verbal), accounting skills, and teamwork skills. We recommend that students who are interested in pursuing a career in corporate finance select the Corporate Financial Management Option. This option provides students with coursework in a broad range of topics related to corporate finance, including international finance, valuation. corporate governance, capital raising, risk hedging and mergers and acquisitions. However, students should keep in mind that there are some specific areas of the corporate finance career path for which other tracks and course options can also be helpful. An example is Budgeting and Forecasting, for which the Financial Accounting Track also provides excellent preparation. The following links provide additional information about the various functions performed by corporate finance professionals. In each description, we also discuss the coursework that best prepares students for these roles.
Financial Planning and Budgeting
Most corporations have groups that put together and update the financial plans and budgets for the corporation and its various business units. These plans and budgets are usually updated at least once per year, but may be modified more frequently to adjust to changes in the business, its markets, and the economy. A corporation’s financial plan is a projection model of its operating results and financial statements for period of 1-5 years into the future. These are usual done in great detail, often on a month-by-month basis, with numbers built up from each of the company’s operating units and product lines. Once these numbers have been projected for future years, the company can then prepare its detailed operating budgets for the coming year. The company can also determine how much additional funding each of its businesses will need (or how much cash they will generate) in future periods. This function is very important to the corporation because it serves as the basis for a number of decisions, including hiring plans, resource allocation, capital spending, the setting of management goals and bonus criteria, and whether additional capital needs to be raised. The professionals who work in this area need to be proficient not only with finance, but also with accounting. It is therefore a logical career path for students who are double-majoring in Finance and Accounting. The Corporate Financial Management Option prepares students for this career path. However, the Financial Accounting Option is an alternative path within the Finance major that can also provide good preparation. In many companies, these financial planning and budgeting groups are a feeder for upper management positions. This is because senior managers of a corporation must understand the business’ financial results, details, plans and budgets, as well as the factors that drive them. They must also understand how the business makes money and be able to devise ways to make it more profitable and grow shareholder value, without taking undue financial risks.
Project Analysis and Approval
(capital budgeting) Corporations are constantly trying to increase their profits by either growing their revenues or reducing their costs (or both). One way to accomplish this goal is by pursuing large capital projects, such as new manufacturing or distribution facilities, as well as expanding or modernizing existing facilities. Finance professionals play a key role in this process, by analyzing the costs and benefits of potential projects to determine whether they will provide a sufficiently high return on the capital required to fund them. The goal of financially successful project is to achieve a return on investment that exceeds the business’ cost of capital. These project analyses are critical to a company’s success, since projects often involve a large amounts of money and can significantly impact the company’s financial results for years. Good financial analysts can help a company to avoid projects with poor financial returns and therefore more effectively allocate its capital to grow the value of the company.
Large corporations are extremely complex entities with operations in multiple locations (and often multiple countries). One of the biggest risks to a business is running out of liquidity (cash and the ability to borrow more cash from its banks). If a business runs out of liquidity, then it will not be able to purchase supplies or pay its workers and suppliers, which can quickly cause major problems (even bankruptcy). A key role of a company’s Treasury Department is to ensure that all of a company’s business units (as well as its headquarters) have sufficient cash, as well as bank credit facilities from which they can borrow additional funds when needed. Another aspect of cash management is making sure that excess cash isn’t sitting idle in portions of the corporation. Unused, idle cash is a drag on a company’s return on investment because it is not earning interest and it could have been invested in new projects or acquisitions to grow the company’s business. Effective cash management in a corporation involves moving cash around a corporation to make sure that it is always optimally invested, in either growing the business or in investments such as bonds that earn interest. A final aspect of cash management involves optimizing the timing of collections of cash from customers and payments to suppliers. Optimizing this timing is important to the business, because the needs of the company’s customers (who often don’t want to pay quickly) and suppliers (who do want to be paid quickly) must be balanced against the company’s day-to-day cash needs. In order to accomplish the goals discussed in the previous paragraphs, the finance professionals involved in cash management must establish healthy relationships with banks and other lenders in the various places where the company does business, as well as have solid systems and procedures in place to monitor cash balances, collections, payments, and bank borrowing capacity throughout the corporation’s many business units and locations.
Lender Relationship Management
Most companies have at least one bank loan or credit line, and larger multinational corporations often have many bank loans. Because of the importance of always having sufficient liquidity (the ability to borrow), it is critical for a company to have a competent group of finance professionals who oversee the company’s relationships with its banks, as well as the various loans that are outstanding. These professionals monitor the company’s loans and credit lines, keeping track of when each loan must be refinanced, how much has been borrowed, when payments are due (and who must be paid how much), and the company’s compliance with covenants and other restrictions in the various loan agreements. These professionals also work with the banks to solve any problems that arise with existing loans, and to find ways for the company to borrow additional funds from existing lenders or new lenders. The Bank Management elective (FIN 4254) is an elective course offered by the Finance Department that offers students good preparation for this type of activity.
Contract Analysis and Management
Many companies have businesses that involve large, multi-year contracts worth millions, if not billions, of dollars. Examples include defense contractors, auto part suppliers, commercial aircraft manufacturers, oil field service companies, and airport concession operators. In these businesses, it is critical to price contracts correctly, or else the business could incur massive losses over a period of many years. In order to price contracts correctly, a detailed financial analysis must be performed, which takes into account the up-front investments require, as well as the ongoing revenues and costs associated with the contract. In addition, once a contract has begun, ongoing analysis must be done every year to ensure that things are going as planned or if modifications are needed.
This is an important group within a company, particularly for corporations with publicly-owned shares and bonds, because it serves as the key point of contact between a company and its investors (shareholders and bondholders). The investor relations group makes sure that the company’s shareholders and bondholders always have sufficient information to make informed investment decisions, as required by federal law for public companies. This information is delivered through the company’s website, its annual report, press releases, webcasts and presentations to shareholders, bondholders and potential investors. Investor relations personnel prepare and update these materials constantly as needed. They also answer questions that come into the company from shareholders, bondholders and potential investors. An investor relations group within a company almost always includes finance professionals, because you need people who know what investors want and need to make investment decisions, and can properly explain it to them. If this job is not done well, the company can anger its existing investors, damage its reputation within the investment community and lose opportunities to obtain new investors, which could hurt the value of its shares or increase its cost of capital (by making it more expensive to issue new bonds). A well-run investor relations group can make the company’s story more attractive to investors, increasing its share price. It can also help calm investor fears when things go wrong, limiting the damage to the company’s share price and ability to raise new funds. Investor Relations professionals must have excellent written and verbal communications skills in order to be effective. It is also important for them to have a good understanding of the stock and bond markets, since they will be speaking with investors from those markets. The Fixed Income Securities (FIN 4224) and Equity Securities (4274) electives provide that background knowledge.
(analyzing acquisitions and other growth opportunities)This is a group within a corporation that analyzes acquisitions, joint ventures, strategic alliances, and other new business relationships that a company is contemplating as a way to accelerate its growth. Finance professionals in this group work with investment bankers, lawyers, accountants and other consultants. They perform detailed financial analyses, including projection modeling and valuation, to determine how much to pay for a new opportunity, how to structure the deal, as well as how to finance it. In addition, they look at a wide variety of other factors to analyze the quality and desirability of a potential acquisition or joint venture partner and its management team. These include the target business’ market and market position, the quality of its products and facilities, laws and regulations that impact its business, it’s management’s track record and reputation, technology and intellectual property issues, and the geographic areas in which the target does business and their future outlooks. All of this is summarized into reports that are presented to the top management (and often the board of directors) of the corporation, who must make the final decision regarding whether or not to proceed with a deal. As a result, business development is a very high profile and important finance job within a corporation. It is usually not a job that is performed by new finance graduates, but instead by finance professionals who have previous experience in investment banking, commercial banking or corporate finance. The Finance Department’s Venture Capital and Investment Banking Course offers students an introduction to the acquisition and divestiture processes.
(arranging stock, bond and loan financings)Finance professionals within a corporation’s Treasury group periodically work on the raising of new capital through the issuance of new shares of stock, new bonds or commercial paper (a type of short-term debt). The funds could be required for a variety of uses, including repaying existing debt or funding acquisitions, new projects or capital required to grow the business. The funds could also be used to repurchase existing shares of stock from investors who want to sell them. Finance professionals work with investment bankers and lawyers to structure the transactions, prepare the necessary documents for investors and regulators, and help market the transactions to potential investors. In some corporations that frequently raise capital, this can be a full-time job, while at most companies, this is done as needed by finance professionals within a corporation’s Treasury group who have other duties as well. Because of the size and importance of these transactions, they are usually overseen by more experienced finance professionals, although they may have more recent graduates on the team in supporting roles.
Risk Management and Hedging
All corporations face various types of risks, and finance professionals play a key role in evaluating those risks, monitoring them, and mitigating them through various types of hedging activities. Types of risks that finance professionals typically try to monitor and mitigate include currency risks, financing risks, interest rate risks, commodity price risks, and customer and supplier credit risks. If these risks are not properly identified, analyzed and mitigated, a company’s profits could be sharply reduced (or even eliminated). The analysis of risks involves a number of finance skills, including financial statement analysis to analyze credit risk, the understanding of markets and financing products (loans, bonds, etc.) to understand financing risks, international finance to understand currency risk, and understanding monetary policy and bond markets to understand interest rate risk. Finance professionals must not only assess each type of risk, but must also estimate the impact on a company’s financial results and cash flows from various scenarios. In addition to assessing and analyzing risk, finance professionals must also devise and execute strategies to mitigate and hedge the various types of risk. An example is using futures and options to hedge against currency or commodity price risk. The finance professional must determine which types of financial products are the best ones to use in a hedging strategy, based on prices available in the markets. They must also calculate the dollar amounts of each product required, and execute the trades to put the hedge in place. In addition, they must actively monitor hedges already in place, in case changes in the markets, the business or the underlying type of risk requires that adjustments be made. Professionals involved in this area should have a thorough understanding of derivatives (options, etc.) and other financial products. They should also be highly quantitative and be interested in the fixed income and commodity markets.
Many large companies (especially older ones) have pension funds to support their employees after they retire. These funds can be become very large over time, often totaling many millions or even billions of dollars. Finance professionals are involved in a number of aspects within the management and administration of these funds. First, the existing money in the fund must be managed effectively, by investing it into stocks bonds and other investments that earn a solid rate of return without taking excessive risk. Finance professionals monitor the funds’ existing investments and make decisions regarding which ones should be added to and which ones should sold. They also seek out and analyze potential new investments that can be added to the fund’s existing investments. Finance professionals in this role should have a strong understanding of investments and markets, as well as strong accounting skills (to analyze individual investments). The Finance Department’s CFA Track is an excellent preparation for this role. Another role for finance professionals that is related to pensions is in determining how much money needs to be invested in the pension funds (including additional amounts that the company needs to provide) in order to satisfy the future payouts that have been promised to retirees. This is an extremely complicated analysis that is performed every year that requires numerous assumptions, and is usually done in conjunction with actuaries and accountants. For companies with 401-K retirement plans, finance professionals are required to choose and monitor the various investment options that are offered to the employees, such as index funds and actively-managed mutual funds. Companies want to offer not only an attractive group of investment options, but also a group of investment options that enable employees to achieve appropriate levels of diversification. Finance professionals monitor the existing managers of the various funds offered in the 401-K and their performance (including how they compare to other comparable funds) to ensure that they are delivering proper value to the employees who invest in them. If warranted, they may also seek out and analyze alternative funds in which the employees can invest.
The Corporate Financial Management Option also provides students with excellent preparation for a variety of finance jobs in the government sector. Finance professionals are employed by a large number of federal, state and local government agencies. Within these agencies, they have a wide variety of roles, requiring a variety of skills and strengths. Some jobs are project-oriented, with a constant stream of new things to learn and experience, while others are more predictable day-to-day. Due to the large variety of government jobs, career paths and employers, we can only attempt to provide a broad overview of the opportunities available to finance majors with various federal, state and local governments and agencies. The following paragraphs outline some of the more common career paths and job opportunities available to finance majors in the government sector.
Budgeting and Planning
Every government agency requires finance professionals to deal with the financial issues involved in running the agency. For example, every government agency (including the military) requires professionals to prepare and monitor budgets and financial forecasts. Many also require professionals who can evaluate large capital spending projects, such as expenditures for buildings and equipment. They also need professionals who can collect and analyze financial data on an ongoing basis to help make their operations more efficient. These analyses and the decisions based upon them often involve large amounts of money and important government and military programs. These types of government positions are often ideal for people who desire a predictable schedule and work/life balance. They also generally provide better job stability than the private sector. However, government sector jobs are often more bureaucratic and have less financial upside than private sector jobs.
Many government agencies issue bonds to provide funding for their operations. At the Federal level, the Treasury Department is the largest issuer of government bonds. However, billions of dollars of government bonds are also issued every year by state and local government agencies. There are also billions of dollars of bonds issued each year by agencies affiliate with the US government, such as the Tennessee Valley Authority and the Federal Home Loan Banks. Professionals within these agencies work with investment banks to structure and market the bond issues. They also put together and provide financial information to investors who purchase the bonds, and continue to provide information to bondholders over the life of the bonds.
Law Enforcement Agencies
With the growth of financial transactions over the internet and the expansion of global financial transactions, there has been an increased emphasis on fighting financial crimes such as money laundering, bank fraud, securities fraud, tax evasion and Ponzi schemes, as well as cybercrimes such as phishing and identity theft related to bank accounts and credit cards. The investigations of many of these crimes by law enforcement agencies such as state police and the FBI often require significant financial expertise and analysis, which finance majors can provide. The IRS and state and local tax agencies also require finance professionals for analytical and investigative work.
Both the State Department and the federal intelligence agencies utilize finance experts as part of the US Government’s international activities. The State Department has officers who promote trade and improved economic relations with countries around the world. These professionals need to have strong business skills, including the ability to analyze data about economies, markets and companies. The intelligence agencies have professionals who analyze the economies of individual countries and the impact of various policies and world events. Many of these professionals are based in the countries that they are dealing with, with assignments often changing every few years. International government jobs are ideal for graduates who want to see the world and get to learn about different countries and cultures. A key success factor (in addition to finance skills) is the ability to learn languages and quickly adapt to different cultures. These jobs are often excellent preparation for careers with multinational corporations. Downsides associated with these career paths include the need to relocate frequently and security risks associate with being located in risky countries. Students seeking international careers should consider pursuing the International Business Minor.
Many finance majors ultimately end up starting up and owning their own businesses. Some do this right out of college, while others do this later in life. A career as an entrepreneur is ideal for individuals who want to be their own boss and aren’t afraid of taking risks. Another positive aspect of an entrepreneurial career is that it enables you to use a broad variety of business skills in addition to finance. As an entrepreneur, you will need to manage people, sell to customers, produce and/or source products, market your business, and set up information and accounting systems. While this is the riskiest of all the possible finance career paths, it is also the one that can provide the largest financial upside, especially if the business is wildly successful. However, students desiring a career as an entrepreneur need to be aware that a high percentage of new businesses ultimately fail. Starting a business is also very time-consuming. Expect to work long hours at a low salary in the initial stages of starting and building the business. An alternative to starting a business yourself is to be the finance person on a team that is starting or growing a business. Many entrepreneurs, particularly those with technical backgrounds, need help with finance and accounting, so they often add a team member with expertise in those areas. Also, many companies have opportunities to participate in the startup of a business within the larger company. These types of experience enable you to enjoy the experience of starting up a business without directly taking large financial risks yourself. Virginia Tech finance majors have started businesses in a wide variety of industries and parts of the country. We believe that Virginia Tech’s finance majors are well-positioned to become entrepreneurs, because the Virginia Tech curriculum provides a broad education in business fundamentals (accounting, marketing, management, business information technology, and business law), combined with finance courses such as Corporate Finance, Asset Valuation and Venture Capital, which prepare you to deal with the financial issues involved in starting and running a business. In addition to a Finance major, students who are interested in becoming entrepreneurs should also pursue the Entrepreneurship minor, which adds additional coursework that is relevant to entrepreneurs. Virginia Tech also has a number of student groups for students interested in entrepreneurship. The Innovate living/learning community is designed to immerse students in entrepreneurship by having them live in a dorm with other students who are interested in entrepreneurship and having them take a series of courses that expose them to the basics of entrepreneurship. The Entrepreneur Club (“E-Club”) is a club for students who are interested in entrepreneurship, and includes students who are trying to start and grow businesses as well as students who are just want to learn more about entrepreneurship. Additional information for students interested in Entrepreneurship at Virginia Tech is available through Pamplin’s Center for Innovation and Entrepreneurship and at the following web pages:
Real Estate is an industry sector that employs large numbers of finance professionals in a variety of roles. Many of these roles involve very similar skills as one would find in a corporate setting, such as project analysis, contract management, and forecasting and budgeting. The tabs below provide additional information about aspects of the real estate finance career path for which the Corporate Financial Management Option can prepare students:
Real Estate Development
Large real estate projects, such as office buildings, residential subdivisions, apartment complexes and shopping malls involve large amounts of capital investment and risk. Because of the amount of money and risk involved, these projects are usually very carefully planned, budgeted and analyzed before the decision to proceed with construction is made. A major part of the process is putting together the financial budgets and forecasts for the project. These take into account not only the costs and timing for building the project, but also the ongoing revenues (such as rents) and costs (utilities, taxes, etc.) associated with the property over the longer term. Once those numbers are in place, one must then perform a financial analysis that determines whether the project will provide a sufficient return on investment for its investors.
Finance professionals are not only involved in the planning phase of a project, but are also involved during its construction. Throughout a project’s construction phase, costs must be estimated, tracked and analyzed to ensure that the building is being built in a financially profitable manner. Any proposed changes to the project must also be analyzed to determine their impact on the project’s cost and financial returns.
Once a building has been built, it must be managed. Part of the process of managing a building involves overseeing the building’s finances: its revenues (rental income), costs (utilities, maintenance, supplies) and capital spending needs (new equipment and structural upgrades). There is also a need to interact with the building’s financing providers (banks and investors) on an ongoing basis. The providers of financing usually require periodic reports about how the building is doing (occupancy rates, revenues, profitability, operating problems, capital spending needs, etc.) In addition, the value of the building must be periodically updated, in case the building needs to be refinanced or sold.