Tuesday, 25 February 2014

Overview of Finance

Finance is about the EFFICIENT use of Money

  • For economies
  • For firms
  • For individuals
Finance is not the same thing as Accounting.
  • Finance is a subset of economics, applying economic tools to the financial information.
  • Primary function of Accounting is record keeping.
  • Finance = Analysis + Decision Making (Not Record Keeping)
  • Finance is Forward Looking
Two Pillars of Finance

1.  RISK

Risk and Return combine to make Value.
Value is the dollar amount that reflects both the risk and the return of the investment opportunity.

Three big areas of finance

1.  Financial Markets
- Focuses on how financial markets and institutions affect the economy.
2.  Business or Corporate Finance
- Focuses on the tools businesses should use to make good decisions.
3.  Investments
- Focuses on the financial decisions that most directly affect individuals.

Major Areas of Business Finance

1.  Financial Analysis and Planning
- Focuses on figuring out what is happening in the firm and forecasting the future
2.  Working Capital Management
- Focuses on management of short-term assets and liabilities.
3.  Capital Budgeting
- Focuses on how the firm decides what assets to buy (what investments to make).
3.  Capital Structure
- Focuses on how the firm finances its operations

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