The Purpose of Finance text
It turns out that numbers are everywhere. You might say that you aren't a numbers person, but that statement does not make numbers go away. Whether you are in marketing, HR, supply chain or strategy, numbers are a key element of all discussions relating to productivity and performance. People who understand the numbers and appreciate how they are used within an organization have a leg up on those who just dismiss numbers as not being important or understandable. Our objective with this course is to help you understand the two most common areas involving numbers within a company, accounting and finance. You will find that the numbers are just a way to quantify your intuition. Numbers help us to be systematic in our analysis. Numbers impose a discipline on us that helps us to consider and quantify all factors relevant to a decision. The numbers assist us with our decision-making. It is important to always remember that we don't work for the numbers, the numbers work for us. The numbers are just a tool to help us make better decisions, and that is what we all want to do, make better decisions. Rather than fear the numbers, or dismiss the numbers, or cop out and say you're not a numbers person, together let us get comfortable understanding and using the numbers. Let's see how we can increase our skill set by getting comfortable with the disciplines and terms associated with these numbers. We will begin with the discussion of finance. What is finance? Let's start with the broad definition. Finance, when we're thinking about organizations, individuals, families, companies, governments, is first about identifying what things I need. Second, how do I get the money to buy those things? And third, how do I manage those things efficiently once I have them? Now, let's drill down inside a company. First, how do I decide what things I need? Well, there are long term decisions that I need to make. Do I need to buy some land? Do I need to buy a building? Do I need to buy machines? That decision-making process is part of finance. Then there are short term decisions. How much cash do I need? How much inventory should I have on hand? Making those decisions is part of finance. Other operating items, how about my level of staffing? Do I have a research and development department? What about my marketing budget? All of these issues are issues of finance and they all require money. So, that leads into the second area of financing. How do I get that money? Do I borrow it? Do I ask shareholders or partners to pull their personal savings and put it into the company so that we can use that to buy the things we need? Or do I use internally generated profits? And third, 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, interfaced with my outside suppliers, my staff. And I also need to decide how to protect the things inside my company. I need to have controls and procedures in place inside my company to effectively manage the things that I have. Now, that's a broad description and definition of finance, but when most people say finance, they have a more narrow set of issues in mind. They are only focusing on one of the three broad issues: How do I get the money to buy the things I need? How does the company get the money? Should they borrow it? Should they seek it from investors? They have to get the money from somebody outside of 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 parties together. A company needs to borrow money, you want to lend money, somebody's gotta put the two of you together. So, when most people talk about finance, realize they're just focusing on this one narrow sliver of finance. Finance broadly defined involves deciding what you need to buy, how you're going to get the money to buy those items, and then how to manage those things once they're inside your company.
