Corporate finance is the foundation of a company’s financial health. It involves the financial planning and tools businesses use to manage money, make smart investments and build long-term financial stability. Whether a company is just starting out or preparing to grow, it needs a clear financial strategy to guide how it allocates resources and maximizes profits.
At its core, corporate finance is about balancing risk and reward.
The right decisions can help minimize losses, support day-to-day operations and create a strong future for the business.
5 Pillars of corporate financial strategy
A solid corporate financial strategy doesn’t rely on one solution, but rather, brings together multiple tools to support a company’s goals. Think of the adage "Don't put all your eggs in one basket." The principle is the same for corporate strategy.
Using multiple strategies can enhance your company's decision-making, manage risk and build a sustainable business that can adapt over time.
The following areas are essential to strong financial management and are used by companies of all sizes to guide their operations and growth.
- Capital structure
- Debt vs. equity financing
- Leverage vs. risk
- Controlling cash flow
- Risk management
Let’s take a closer look at how these work and why they matter.
1. Build a strong capital structure
One of the most important decisions a business makes is how to raise the money it needs to operate and grow. This is known as the capital structure—the mix of debt and equity a company uses to fund its goals.
Every company has different short- and long-term needs, and the right approach to capital financing depends on factors like tax implications, asset types and risk levels. Owners must take time to analyze their situation and determine the best options for their company’s capital structure.
Choosing the right mix of financing isn’t just about access to money. It’s really about setting the foundation for future success.
2. Balance debt financing and equity financing
When it comes to raising capital, businesses often consider two main options: debt financing and equity financing.
Each option has its own pros and cons, and the best choice depends on the needs of the business.
Debt financing (utilizing debt securities) is when a company secures a loan from a financial institution or entity.
Pros of debt financing
- No investors or business partners are involved, so the owner keeps 100% control of the company.
- The interest portion of the loan payment is typically tax deductible, which may reduce the company’s tax liability. (This depends on the business structure, so it’s important to consult with a CPA about specific tax considerations.)
- On-time loan payments can be reported to business credit bureaus, helping to build credit over time.
Cons of debt financing
- The owner may be personally responsible for paying back the loan if the business has to liquidate.
- The company takes on debt. Most businesses carry some debt, but it must be managed carefully to avoid being overleveraged. (We’ll talk more about this under financial leverage.)
Equity financing is another option. Instead of taking out a loan, a business can bring on investors to help fund operations. These investors share in the business risk, which eases the burden on the owner.
Pros of equity financing
- Investors are more flexible if the business runs into challenges and may not require immediate returns.
- In addition to funding, they often bring valuable experience, industry knowledge, and networks. For example, a bakery owner might look for an investor with restaurant experience to avoid common mistakes and reduce costs.
Cons of equity financing
- The owner may have to give up a portion of ownership and decision-making control.
- It can take time to find the right investor—someone who shares the business’s vision and long-term goals.
Choosing between debt financing and equity financing is a major decision in shaping the company’s capital structure. Each comes with trade-offs, and many businesses use a mix of both. Choosing the right mix for your operation is a foundational part of your business strategy.
3. Calculate financial leverage and risk
Financial leverage refers to how much debt a company uses to finance the purchase of assets. Leverage can boost gains, but it also increases exposure to losses. When your earnings fall short of covering debt, a business faces tough choices—and potential consequences.
In these cases, companies may need to reduce assets, take on more debt, or issue additional stock. Each of these options can negatively impact shareholder value and the owner’s earnings.
Let’s look at an example.
Susie owns a brick-and-mortar apparel business. She took out a business loan to open her store two years ago. But due to the rise of online shopping, her sales have dropped significantly. She now struggles with unsold inventory and declining revenue, and she still owes $10,000 on her original loan.
With falling income, she can’t keep up with operating costs or loan payments. To stay afloat, she has three options.
- Move the business online to reduce overhead
- Partner with an investor who believes in her products and can provide capital
- Take out another loan, which would increase liabilities and strain her ability to repay without a clear increase in future sales
What should she do?
Choosing the right financial strategy—especially during periods of loss—is critical for minimizing financial risks and protecting the business’s future.
4. Manage cash flow
Effective cash flow management is essential for any business. Owners need to know exactly how much money is coming in and going out to keep operations running smoothly.
One of the most common mistakes new business owners make is mixing business and personal finances. For example, they might use a business credit card for small personal expenses, assuming it won’t make a difference.
But those small purchases add up, and they affect the company’s financial statements.
Why a cash budget matters in corporate finance
A cash budget helps forecast cash inflows and predict when shortfalls might occur.
Businesses often place supply orders on credit and receive invoices later. But when those invoices are due, they need to have the actual cash to pay them. If spending exceeds the budgeted amount for the month, the company may not have enough cash available to cover debts, expenses, or bills.
That’s where capital budgeting and consistent tracking come in—companies must plan not just for the month ahead but for the long term.
Companies can have too much cash as well as too little
Sometimes, a company’s cash flow shows a deficit. Other times, it reflects a surplus. But even having too much cash on hand isn’t always a good thing, especially if that money isn’t being used effectively.
Take Abigail, for example. She’s the CEO of a publicly traded tech company. Her financial statements showed a $50 million cash surplus. Investors weren’t happy. They believed too much of the company’s earnings were just sitting idle, rather than being reinvested into growth or returned to shareholders.
Some of that money, investors argued, could have gone toward additional capital expenditures, investment opportunities, or larger dividend payouts.
This is similar to personal finances. It’s not ideal to have large sums of cash sitting in a checking account or tucked away unused. In business, just like at home, money needs a purpose.
5. Protect company value with smart risk management
With thoughtful risk management, companies can protect their bottom line and respond to unexpected challenges more effectively. From market shifts to natural disasters, financial risks can’t always be avoided, but they can be planned for.
Business owners often focus on getting the capital needed to launch a company, but many don’t plan far enough ahead.
Types of risk in corporate financial strategy
There are several types of risk that corporations must monitor and plan for.
- Systemic risk: A widespread event or failure that affects the entire financial system. Though it can’t be eliminated, it can be mitigated through a diversified portfolio, like investing in a mix of cash, real estate and fixed income.
- Operating risk: The risk tied to a company’s cost structure, including fixed and variable expenses.
- Business risk: Uncertainty related to a company’s earnings, based on its industry and operations.
- Financial risk: Risk associated with how the company funds itself—its mix of debt and equity.
During the pandemic, many corporations faced unexpected losses. Some never recovered, but others were able to stay afloat thanks to strong planning and financial contingencies. This kind of preparation requires making strategic decisions, like minimizing variable costs, improving margins and preparing for external pressures.
Because markets are unpredictable, corporations need a plan to navigate economic swings. That includes spreading investments across asset types and avoiding overexposure to any one category.
Diversification should include a mix of equities, capital investment, fixed income and preferred stock. Many companies also work with investment banks to manage portfolios and evaluate growth strategies.
Good strategy strengthens a company’s financial position
Strong financial planning is the foundation of any successful business. By focusing on key corporate finance strategies—like managing capital structure, maintaining steady cash flow and preparing for risk—companies can improve both short-term stability and long-term growth.
These aren’t one-time choices—they’re ongoing corporate finance activities that require attention, adaptability and the right expertise. This is why so many organizations employ a chief financial officer (CFO). Educated and knowledgeable decision-making in finance has everything to do with the company's overall success.
But if you're part of a small business or if you want to launch into a start up, your company might not have the luxury of a CFO. In these cases, corporate finance strategy might come down to you!
If that sounds like your situation, check out 5 Degrees for Small Business Owners Who Want to Stay Solvent in Tough Times.
This article is for general informational purposes only and does not constitute financial advice.
