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
ASSETS - Something a company owns, your future benefit
LIABILITIES - Something a company owes, someone else’s benefit
Corporate Structure
How do companies raise money ?
Debt | Equity | |
---|---|---|
Meaning | Funds owed to another party | Funds raised by issuing Shares |
What is it? | Loans | Own Funds |
Reflects | Obligation | Ownership |
Term | Short / medium term | Long-term |
Status of holders | Lenders | Proprietors |
Risk | Less | Higher |
Types | Term Loan, Bonds | Shares & Stocks |
Return | Interest paid | Dividend |
Nature of Return | Fixed & regular | Variable & Irregular |
Collateral | Required depending on lenght of time | Not required |
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, ...
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