Chapter Outline
1.1 What Is Finance?
1.2 The Role of Finance in an Organization
1.3 Importance of Data and Technology
1.4 Careers in Finance
1.5 Markets and Participants
1.6 Microeconomic and Macroeconomic Matters
1.7 Financial Instruments
1.8 Concepts of Time and Value
Why It Matters
Finance is essential to the management of a business or organization. Without good financial protocol,
safeguards, and tools, running a successful business is more difficult. In 1978, Bacon Signs was a family owned, regional Midwestern sign company engaged in the manufacture, sale, installation, and maintenance of
commercial signage. The company was about to transition from the second to third generation of family
ownership.
War, and the oil embargo and was working its way through historically high rates of inflation and interest
rates. The family business had successfully struggled through the ebb and flow of the regional and national
economy by providing quality products and service to its regional clients.
In the early 1980s, the company’s fortunes changed permanently for the better. The owner recognized that
the custom signs built by his firm were superior in quality to the signs it installed for national franchises. The
owner worked with the company’s banker and vice president of finance and operations to develop a
production, sales, and financing plan that could be offered to the larger national sign companies. The larger
companies agreed to subcontract manufacturing of midsize orders to Bacon Signs. The firm then made a
As Bacon Signs’ reputation for quality.
grew, so did demand for its products. The original financing plan anticipated this potential growth and was
Introduction to Finance
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1 • Why It Matters 7
8 1 • Introduction to Finance
designed to meet anticipated capital requirements so that the firm could expand how and when it needed to.
Bacon Signs’ ability to manufacture and deliver a high-quality product at a good price was the true value of the
firm. However, without the planning and ability to raise capital facilitated by the financing plan, the firm would
not have been able to act on its strengths at the critical moment. Financing was the key to expansion and
financial stability for the firm.1
people make consistently good and repeatable decisions.
1.1 What Is Finance?
Learning Outcomes
By the end of this section, you will be able to:
• Describe the main areas in finance.
• Explain the importance of studying finance.
• Discuss the concepts of risk and return.
Definition of Finance
Finance is the study of the management, movement, and raising of money. The word finance can be used as a
verb, such as when the First National Bank agrees to finance your home mortgage loan. It can also be used as
a noun referring to an entire industry. At its essence, the study of finance is about understanding the uses and
sources of cash, as well as the concept of risk-reward trade-off. Finance is also a tool that can help us be better
decision makers.
Basic Areas in Finance
Finance is divided into three primary areas in the domestic market: business finance, investments, and
financial markets and institutions (see Figure 1.2). We look at each here in turn.
Figure 1.2 The Three Basic Areas of Study in Finance
Business Finance
Business finance looks at how managers can apply financial principles to maximize the value of a firm in a
risky environment. Businesses have many stakeholders. In the case of corporations, the shareholders own the
company, and they hire managers to run the company with the intent to maximize shareholder wealth.
Consequently, all management decisions should run through the filter of these questions: “How does this
decision impact the wealth of the shareholders?” and “Is this the best decision to be made for shareholders?”
In business finance, managers focus on three broad areas.
Your Money Needs a Filter
The truth is, financial noise is always there. Social media is flaunting their wealth, news outlets are yelling about the impending recession, and people are spouting their two cents. It’s overwhelming. Where true control begins is by ignoring the noise and filtering out the distractions.
Imagine your financial plans as noise-cancelling headphones in a noisy environment, where you can filter out the noise and focus on the signal of what you desire most in your life, whether it is security, freedom, or something else that is important to you.
Meaning, unfollow what fuels envy, define what “enough” looks like for you, and remember your finances are personal. Before you manage your money, you have to manage your mind. Everything is protecting financial peace. Within that clear quiet, you make decisions from intention, not panic. And that becomes the bedrock of every smart move.
Part 2: Your First Three Money Moves
Take simple, powerful action with a clearer head. Start here.
The One-Month Track: For 30 days, write down every penny you spend. No guilt, just truth. You’ll almost certainly find a few surprising leaks.
The $500 Buffer: Your first goal isn’t a huge emergency fund. It’s a simple $500 cushion. This turns a surprise bill from a crisis into a minor hiccup and keeps you out of debt.
The Automatic Transfer: Set up an automatic transfer of even $25 from your paycheck to savings. This is “paying yourself first.” It builds your buffer and future without you having to think. Master these steps. They create the stability and awareness you need to confidently build from a position of strength
