Introduction

What is finance ?

Finance is the management of money

Why is finance important ?

Investing

• Allocating resources (money)
• Expectation of return
  • Income
  • Profit
  • Career opportunities
• There is a risk
• Different investment resources:
  • endeavours: assets, seed money, ...
  • resources: time, effort, ...
  • financial assets: stocks, bonds, ...
  • business assets: business projects, property, ...

Borrowing

• Lookin for "funding"

• Financ. instituations will lend money

• Expected to pay back

• Funding for:

  • Business operations
  • Projects
  • Buy Assets

Lending

• Financ. instituations will lend money
• No debt
• Funding for:
  • Business operations
  • Projects
  • Buy Assets

Saving

When companies/individuals place their money in the bank to keep

Budgeting

Deciding where to allocate the resources you have (project A vs project B)

Forecasting

Predicting the future based on past events

• Next year
• In 3 years
• In 5 years

Business Roadmap

Corporate Structures

Sole trader

• Work alone
• Unlimited liability (can lose everything)

Partnership

• At least one member (lawyers, accountants, ...)
• Unlimited liability (can lose everything)

Limited companies

• Established entreprises
• Limited liability (can only lose what was invested)

Limited Companies

Private Limited Companies ("Ltd")

• Family, small to medium size
• Restricted source of funding
• Company information is restricted

Public Limited Companies ("Plc")

• Quoted on Stock Exchanges
• Greater funding options
• Company info more readily available

Assets and Liabilities

Corporate Structure

How do companies raise money ?

Main questions in finance

1. How do corporations make financial decisions? (“corporate finance”)

• (a) Investment decisions:
  • Which projects to invest in?
  • Purchase of real assets
• (b) Financing decisions:
  • How to fund the investments?
  • Sale of financial assets/securities (equity, debt, hybrid securities)
• (c) Payout policy: Retain earnings or pay back to shareholders?
• (d) Risk management: What risks to take or to avoid?

2. How do financial markets determine asset prices? (“asset pricing”)

Key terms

• Sole Proprietor = One employee, unlimited liability
• Partnership = At least one member, unlimited liability
• Corporation Limited Liability = Pay only what was invested
• Real Assets = Tangible assets (that can be touched)
• Financial Markets = Place where investors trade securities, stocks
• Capital = Assets and money needed for the business to operate (long-term debts)
• Budgeting Decision = Where to allocate the money ?
• Financing Decision = How to fund investments ? Do we sell our assets ? How to raise funds ?
• Capital Structure = Mix of different forms of assets (tangible, non-tangible, financial)
• Capital Structure = Mix of different forms of external source of finance (loans, investors, ...)
• Capital Markets = Market where debts, securities, bonds, ... are traded
• Financial Intermediary = Middleman during a financial transaction (banks, investment banks, stockbrokers, ...)
• Primary market = Market where securities are created
• Secondary market = Market where securities are traded
• Treasurer = Employee that oversees the finance department
• Controller = Employee in charge of the accounting department and reports to CFO
• CFO = Responsible for both finance and accounting departments
• Agency Problems = Conflict of interest where one party is supposed to act in the best interest of another
• Stakeholder = Person that has vested interest in a company and can either affect or be affected by the business
• Financial Assets = Stocks, investments, shares, bonds, ...