As co-founder of Afterpay, Anthony Eisen recently sold 10 per cent of his shares in the business for over $125 million. Shortly afterwards, he oversaw a capital raising of $1 billion for the global expansion of this buy-now-pay-later success story.
To arrive at this successful point, Eisen started his first job in 1995 with the basics of a corporate finance career.
Since then, he’s been involved in financing and capital raising, capital budgeting, financial management, corporate governance and risk management. These are the five fundamentals you need to start your own corporate finance career.
What is corporate finance?
Corporate finance is primarily about maximising the financial outcomes of a business. It involves working closely with the accounting department, CEO and the board – but it’s different to all three.
Accounting is concerned with recording and reporting financial transactions, while corporate financial operations focus on financial management. The CEO makes decisions about running a business based on modelling from corporate finance’s corporate budgeting and capital raising projections. And the board oversees risk management and corporate governance, which are also corporate finance functions.
Corporate finance is an exciting field with a wide range of positions, including Senior Payroll Officer, General Manager and Chief Financial Officer.
What are the soft and hard skills needed to succeed in finance?
Like Eisen, many corporate finance careers are built on experience in accounting and commerce.
As for soft skills, corporate finance is a great place for problem solvers – particularly if you have a detective’s attention to detail. Success also relies on being able to develop strategy and apply some entrepreneurial nous.
What are the five basic functions of corporate finance?
Dylan Moldrich has a long international career as a finance professional. He’s identified the five corporate finance basics. Knowledge of these areas is step one in how to get a job in corporate finance.
Financing and capital raising
One of the key questions that corporate finance professionals have to answer is, ‘what is the cheapest form of finance?’. The answer can make or break business goals.
“The business can fund new investments in many ways,” Moldrich says.
“They can use their retained earnings – the saving of profits already made by the business. But if there isn’t any money available within the business, then they have to raise money from external sources.”
When it comes to raising capital externally, there are two distinct sources of money. There’s debt capital, which is like a bank loan with interest, or equity capital, such as Afterpay’s shareholders – who expect a return on investment.
“The business needs to decide their preference, do they wish to raise debt capital or equity capital, or a combination of the two. The main issue here is to raise the money in the cheapest possible way,” explains Moldrich.
In the case of Afterpay, to fund their international expansion, the cheapest possible way appears to have been the market – with the issue of $1 billion in shares. What makes this possible is that Afterpay has leverage in equity capital after shares rose 660 per cent in value in just three months.
“You need an understanding of the cost of debt, the cost of equity, the weighted average cost of capital and the impact of leverage. All of these things help the corporate finance professional make good capital raising decisions,” Moldrich says.
Often, the only time you hear about capital budgeting is when there’s a budget blowout. It usually involves a government department and a dollar sign with a lot of zeros behind it. As you can imagine, it’s a sign of capital budgeting going horribly wrong.
What makes capital budgeting trickier than annual budgets is that it’s for business opportunities that might have a long time horizon – between one and twenty years.
“It involves evaluating what we need to invest to get the project up and running, then the cash flow that the project will generate each year, over its useful life. Then we evaluate the project to see if it is viable or not,” explains Moldrich.
“We use various capital budgeting techniques such as the internal rate of return, the net present value, the payback period, the return on investment, and more complex issues like valuing options. That’s what capital budgeting is about.”
These techniques alone can provide enough financial data to green light a project – or shut it down, before it’s even considered.
While capital budgeting provides decision-making information, financial management is about making those decisions. It’s a balancing act. On one side of the scales are business opportunities and on the other side is the cost of financing those opportunities.
“The role of financial management is to evaluate the commercial viability of these opportunities and ideas. Is it an idea that is going to bring profit to the business? Is there a potential pot of gold at the end of the rainbow?” says Moldrich.
The answer to that question often lies in the cost of the finance required to get the rainbow off the ground. Financial management is the ability to obtain the funds to finance these projects at the right price.
If a profit’s likely, then the corporate finance professional should implement the proposal. If not, then it should be abandoned.
“Every business is always looking for growth opportunities. It could be a big project like buying a factory or a small project like buying a piece of software. Whatever the decision, in your job as a corporate finance professional, you’ll be asked a question: does this investment make sense?” Moldrich explains.
“And you must have the skills, the numerical and analytical skills, to do the evaluation and say ‘yes, this investment makes sense,’ or ‘no, there might be a better place to invest our resources’,” he adds.
Albert Einstein reportedly said, “Not everything that can be counted counts, and not everything that counts can be counted.” He could have been thinking about corporate governance, which isn’t directly concerned with finance, but heavily influenced by it.
“First and foremost, in the workplace and in your career path, you have to understand the values of the corporation you’re working in. In most instances, the expectation is that you work in an ethical manner with integrity. That is sort of paramount in everything you do,” Moldrich says.
“Corporate governance starts with an understanding of the values of the business. It involves putting in place a proper culture for the business. Then systems and processes to ensure that people are working within those values.”
Corporate finance professionals are often called upon to ensure that company financial policies and processes for proper governance are in place. They’re often actively involved in designing these procedures.
What makes these financial activities particularly challenging is that businesses have a lot of stakeholders. These include owners, investors, employees, customers and many more. And stakeholder’s expectations are often in conflict with each other.
“So, what corporate governance has to do, in a sense, is understand the expectations of all these various stakeholders. You have to manage that conflict, and ensure the business is running for the benefit of all stakeholders,” says Moldrich.
Risk must have been on Anthony Eisen’s mind in 2016. With $8 million of private investment behind them, Afterpay floated on the share market. Stocks rose by 25 per cent on their first day, which is a great outcome. However, the company’s revenue for the first half of that year was just $220,000. That’s enough to make the coolest corporate finance professional’s palms sweat!
“From a corporate finance sense, risk management is assessing the impact of something going wrong on the viability and the performance of the business. So, in every key decision the business makes, they will assess the inherent risk in that decision. What if something went wrong, what does it do to our profits, what does it do to our very existence?” Moldrich says.
Some decisions have a low risk and impact. Others, like a $1 billion capital raising, will have the corporate finance professional actively involved in assessing and mitigating risks.
In addition to starting your corporate finance career, these five key skills can help your decision on post-graduate education. What risk does a lack of finance qualification pose to your career goals? Do you have the corporate governance abilities to step into senior roles? Now review your capital budget, decide with financial management, and secure your finances for the first step on your corporate finance career path.
Learn more about VU Online’s Graduate Certificate in Finance or get in touch with our Enrolment team on 1300 043 531.