From the course: Corporate Finance Foundations

Finance inside of companies

From the course: Corporate Finance Foundations

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Finance inside of companies

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- So, what is finance? Finance broadly defined involves deciding what you need to buy, determining where you're going to get the money to buy those things, and then managing those things once you've bought them. Let's drill down inside a company to learn how companies make decisions about financing and how those decisions impact company spending. First, how do I decide what things I need? Well, there are long-term decisions that need to be made. Do I need to buy some land? Do I need to buy some buildings? Do I need to buy machines? This long-term decision making process is part of finance. Turns out, short-term finance decisions include deciding how much cash I need, how much inventory should I have on hand, should I let my customers buy on credit? Making these short-term decisions is part of finance. These short-term finance decisions also include deciding on operating items such as the appropriate number of staff and the right amount of research development and marketing. All these decisions, long-term and short term, are issues of finance, and they all require money. So that leads us into the second area of finance inside of a company. What do I get that money? Do I borrow the money? Do I ask shareholders or partners to pool their personal savings and put them into the company so that we can use that money to buy the things we need? Or do I use internally generated profits? And the question underlying the third major area of finance is this, Once I have all those things and I've paid for them, how do I manage them? That's an issue of timing, scheduling budgets, interfacing with my outside suppliers and my staff and so forth. And as part of managing things inside my company, I also need to decide how to protect those things. I need to have controls and procedures in place inside my company to effectively manage the things that I have. Now, when most people say finance, they have a more narrow set of issues in mind. They are usually only focusing on the second of the three broad issues. How do I get the money to buy the things I need? And this issue of obtaining money applies on both sides. The company seeking the money and the investors providing the money. The company seeking money, consider whether to borrow the money from a bank or other lender, or to receive the money as an investment from partners or shareholders. In whatever way the company gets the money they have to get the money from somebody outside the company. So those outsiders, do they want to invest in this company or do they want to invest in that company? And there are third parties involved, financial institutions that put these two parties together. One party needs to borrow money, another party wants to lend money, somebody has to put these two parties together. So when most people talk about finance, realize that they're usually just focusing on this one narrow sliver of finance. The process of a company obtaining the money it needs to buy the things that it wants. But you should realize that finance is much bigger than just this one issue.

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