The modern world runs on finance, and whether you're ready to admit it or not, corporate finance is the culprit behind so many phenomenons that impact our daily work and family lives. Remember the great recession that started in 2007? Finance played a significant role.
Are you're looking to...
- Retire from your job someday?
- Evaluate an investment opportunity?
- Determine the price to pay for an acquisition?
- How about know how much debt you can take on?
Please keep reading on to learn why corporate finance is integral to each and every one of these decisions. Regardless of your career aspirations, knowing a little bit about finance can go a long way.
Describing Corporate Finance in Just a Few Words:
We're going to assume that this is your first exposure to finance, so while reading this blog article, no prior knowledge of corporate finance will be required.
If we could describe corporate finance in just a few words, then we'd say something like this:
"Finance is a discipline that deals with the management of all things CASH."
This includes raising it, spending it, protecting it, and investing it. As you can probably guess, cash is a REALLY big deal in the world of corporate finance. It's at the heart of whatever financial analysis you're doing.
The Role of Accounting in Corporate Finance...
Accounting and Finance is terminology that is often used interchangeably. However, they're not the same thing. Accounting deals with business transactions, which are the activities associated with buying and selling of goods and services.
Accounting processes, records and reports these transactions to stakeholders. Be they management, or external stakeholders like investors, analysts, or tax authorities. Accounting tends to be backward looking in it's orientation.
Now, Here's The Difference Between Accounting & Finance:
While accounting tends to backward looking to ensure the numbers are correct, finance on the other hand is always looking forward. Financial analysis more often than not, supports management decision making.
Matters pertaining to corporate finance have direct implications on the creation of shareholder value.
What's A Shareholder You Might Ask?
The creation of shareholder value is considered to be the holy grail of finance. Shareholders are those individual owners of a business. They are the people who invest their savings on the expectation of generating an investment return. In other words, if you buy common shares in a company like Apple or Microsoft, you'll hope that the value of your shares will eventually appreciate.
However, as sexy as it is to be a shareholder and tell all of your friends at cocktail parties that you're an owner of Apple shares. Keep in mind that as an owner, you hold the most risky investment position in the company.
The reason for this is because shareholders represent a Residual Interest. In the event of liquidation of a company, shareholders ALWAYS get paid last.
Here's an interesting fact: ⬇
If you believe liquidation is only a remote possibility, then keep in mind that of the 100 largest companies 100 years ago, only 18 of them still exist today. Some of which include the following:
- Coca-Cola
- JCPenney
- UPS
- Boeing
- LLBean
- Harley-Davidson
- Kraft Foods
- Kellogg's
- Equifax
- & Target just to name a few...
Source: 100-Year-Old Companies Still in Business Today: GoBankingRates 2021
And Then, There's Secure Lenders, AKA Creditors...
These are people who have a claim against specific assets. In the event of liquidation of a company, creditors ALWAYS get paid first.
Then, there are priority payables to such creditors as the government and employees.
Then, there are the unsecured creditors, like the suppliers. The list of creditors then continues to go on-and-on.
If the company makes no money, then the shareholders stand to loose the value of their investment. However, if the company becomes successful, the advantage of being a shareholder with a residual interest means that all of the upside is yours.
In Conclusion
We've really only scratched the surface on this blog article about corporate finance. There are many other areas that must be covered in order to have the full understanding.
Those other areas include:
- Financial Analysis
- Cash Forecast
- Present Value
- Future Value
- Rate of Return and Financial Leverage
- And so much more...
Our YouTube Channel has plenty of videos that cover the rest of these topics in much greater detail. CLICK BELOW to check out our channel. There, you'll be able to access the rest of our corporate finance lessons for FREE...
