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Why study finance?

Holistic Finance-

 

Finance is probably the most all encompassing business field there is.  It literally takes into account all aspects of business.  Economics, Marketing, Productions, Accounting, Management, even information systems are all summarized and wrapped up in Finance.

But enough about why to study it, what is it?

What is Finance? Read what I said in a newsletter not too long ago when I was asked to describe what Finance is:   Finance is the most encompassing of all business enterprises.  To understand finance you must know about the entire business, indeed the entire economy.  So for a few minutes lets step back and pretend that we never took economics and are new to this earth. The Financial system (or the economy if you prefer) is composed of consumers, manufacturers, distributors.  These groups need money to purchase products and services. One way of looking at Finance is that Finance is that field of study that is responsible for getting the money to purchase these goods and services The purpose of the Financial System is to make sure that the money flows to those who value it the highest (that is those who can put it to the “best” use). Within the Financial profession there are traditionally 4 main areas of finance Corporate Finance Investments Financial Institutions International Finance

BTW Here if you really feel like being contrary you might argue that personal finance is an additional area of finance and to that I would have to agree.  But since the text that we were using the semester I wrote this said there are 4 main types, we’ll live with that for now.  And anyways, who wants to be contrary.  🙂 We will look at all four areas (OK five if you insist) throughout the semester but will spend much of our time focusing on Corporate Finance because it is the most essential for anyone in business.  In fact it is sometimes called Business Finance
Where does Finance fit within in a firm? Finance is generally seen as a staff position.  That is it does not directly produce anything but rather helps others produce things.  The head of the Finance Department is called a CFO (or VP of Finance).  (S)he reports directly to the CEO and is often the second highest paid person at the firm.

The Finance Department is responsible with three main types of questions: Capital Budgeting–which is a fancy way of saying “what should we invest in?” Obvious answer is in projects whose benefits exceed the costs. Capital Structure-this is how the firm should obtain the necessary money “it needs to support its long term investments.”  English translation is: how much debt and how much equity should the firm have and how (from whom) should the firm raise these monies from. Working Capital Management-This is more of the day-to-day operations at most firms.  It is concerned with short term assets and short term liabilities.  Examples of these issues include how much inventory to hold and whether to allow customers to buy on credit.


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