Principles of Finance

Introduction to Finance

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 familyowned, 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. Bacon Signs, established in 1901, had weathered the Great Depression, World War II, the Vietnam 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 commitment to build and deliver these signs on time and under budget. As Bacon Signs’ reputation for quality grew, so did demand for its products. The original financing plan anticipated this potential growth and was 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.

In this book, we demonstrate that business finance is about developing and understanding the tools that help people make consistently good and repeatable decisions.

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 and discipline of money, currency, and capital assets. It is related with, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods, and services.

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.