- What is finance? Let's start with a broad definition. Finance, when we're thinking about organizations, individuals, families, companies, governments, finance is identifying what things I need, first. Second, how do I get the money to buy those things? And third, how do I manage those things efficiently once I have them? Let's drill down inside a company. We'll focus on companies for just a minute. First, how do I decide what things I need? Well, there are long term decisions that need to be made. Do I need to buy some land? Do I need to buy some buildings? Do I need to buy machines? That decision making process is part of finance.
Short term things, how much cash do I need? How much inventory should I have on hand? Making those decisions is part of finance. And operating items, how about the level of my staff. Do I have a research and development department? What about my marketing budget? All those issues are issues of finance and they all require money. So, that leads into the second area of financing side of company. Where do I get that money? Do I borrow it? Do I ask shareholders or partners to pull their personal savings and put it in the company so we can use that to buy the things that we need? Or do I use internally generated profits? And third, once I have all those things and I've paid for them, how do I manage them? That's an issue of timing, scheduling, budgets, interfaces with my outside suppliers, my staff.
And I also need to decide how to protect the things inside my company. I need to have controls and procedures in place inside my company to effectively manage the things that I have. Now that's a broad description and definition of finance, but when most people say finance they have a more narrow set of issues in mind. They're only focusing on one of the three broad issues. How do I get the money to buy the things that I need? And that happens on both sides. How does the company get the money? Should they borrow it? Should they seek it from investors? But they got to get the money from somebody outside.
So those outsiders, do they want to invest in this company or do they want to invest in that company? And there are third parties involved. Financial institutions that put these parties together. You need to borrow money. You want to lend money. Somebody's got to put you together. So when most people talk about finance, realize that they're just focusing on this one narrow sliver of finance. Finance broadly defined involves deciding what you need to buy, where you are going to get the money to buy it, and how to finance those purchases and how to manage those things once they're inside the company.
- Understanding financial statements
- Managing finances in the short term
- Analyzing risk and return
- Obtaining short-term and long-term financing
- Understanding the stock and bond markets
- Comparing the Facebook and Microsoft IPOs
- Working with financial institutions
- Using capital budgeting
- Creating simple personal saving and investment plans