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Finance – Week 1 Lecture

Introduction to Financial Management

This week you will be introduced to a wide variety of topics all pertaining to finance. Your goal is to get your feet wet, learn basic terms and concepts to prepare you for the rest of the course, and perhaps most importantly: find a reason to really want to learn more about finance. The truth is, all organizations, even your household, are impacted by finance. From small start-up companies, the local barber shop, to large multi-national organizations, they all rely on basic concepts of finance to function successfully.

You’ll learn about a lot of very important concepts throughout the next eight weeks. Financial analysis, the time value of money, debt, equity, stocks, and how much it costs to finance a business are all key topics you will dive into. Before you can approach all of these successfully, however, it’s important to find value in them. Take a bit of time in your first week and consider your current employer, your career path, and even your financial state at home. What do you currently know about how your employer finances their operations? Are you involved in the budgeting process or in choosing new projects to invest in? Do you know how much it costs your employer to obtain money to invest in and grow the business? Look at your own personal finances. Do you have any large projects you are considering? A new home, new car, additional education? How might you assess the return on these things to choose the best option? The concepts you will learn in this course will have a place in all of those situations and so many more. Once you can clearly see how beneficial the course concepts are, you’re far more likely to see useful and immediate application for what you are learning!

Take another moment to consider your current or previous employer. Do you know what kind of business structure it is? Is it owned and operated by just one person (maybe even you!)? If so, it’s a sole proprietorship. Is it owned and operated by two or more individuals? If so, it’s likely a partnership. Is it a large organization that has stockholders? That’s a corporation! Each type of business formation has very distinct advantages and disadvantages. It’s one of the first decisions we face when starting a business and will have a significant impact on the financial decisions that follow.

Sole proprietorships are a very common form of business structure and are very easy to establish. There are no required forms to file or complex partnership contracts to create. If you wake up one morning and say “I’m going into business by myself”, then you’re a sole proprietor. It’s that easy! Though easy to form, there are some key disadvantages as well. You are in it alone, so the financial burden falls squarely on your shoulders alone. You are also the only person to offer expertise and ideas for the business as well.

Now, if you head out to dinner with your neighbor and write down all your great ideas on a napkin you’ve also formed a new business, a partnership! Partnerships are also easy to form. Written partnership agreements are strongly encouraged, but not required, to start a partnership. You get the benefit of more people to share the financial burden and a wider mix of expertise and experience in the business. As a downside, however, now you also have the potential for more conflict or disagreement. You aren’t the only one running the show any more!

Finally, we could choose to form a corporation. Corporations offer a wide variety of benefits, but they are a bit more difficult to form. We can’t just wake up one morning say, “I’m incorporated”. Articles of incorporation must be written and filed with the Secretary of State. The extra work is often worth the effort though. Corporations enjoy limited liability, which standard partnerships and sole proprietorships do not. Limited liability means that the investors are limited in the amount of money they can lose. They can lose no more than the amount they have invested in the company. So, if a shareholder owns a few shares and the company suffers a fire and burns down, the shareholder will lose no more than the amount of their original investment. If, on the other hand, it was a sole proprietorship and the fire caused the whole block to burn down, the sole proprietor is solely responsible for the losses. This means that the proprietor’s personal assets are also fair game in being responsible for the loss. They are not limited to the amount they invested in the business.

Choosing a business structure is just one of many financial decisions businesses must make. Pay attention to your personal and professional life as you move through the course, trying to spot the concepts you are learning at work all around you! 

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