- What is finance?
Let's start with a broad definition.
First, when we are thinking about organizations,
individuals, families, companies,
governments, finance is identifying what things I need.
Second, finance is determining
how to get the money to buy those things,
and third, finance is managing
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 need to be made.
Do I need to buy some land,
some buildings, some machines,
that long-term decision-making process is part of finance.
Short-term finance decisions include deciding
how much cash do I need,
how much inventory should I have on hand,
should I let my customers buy on credit?
Making those short-term decisions is part of finance.
The short-term finance decisions also include deciding
on operating items, such as the appropriate number of staff,
the right amount of research and development,
the right amount of marketing.
All those decisions, long-term and short-term,
are issues of finance, and they all require money,
so that leads into the second area
of finance inside a company, where do I get that money?
Do I borrow the money?
Do I ask shareholders or partners
to pool their personal savings and put them in the company,
so we can use that money to buy the things that 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 have 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.
As part of managing things inside of 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, 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 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.
So when most people talk about finance,
realize that they are usually just focusing
on this one narrow sliver of finance,
the process of a company obtaining the money it needs
to buy the things it wants.
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
they are inside the company.