The Finance, Capital, and Management class has been highly informative. It has been both memorable, and applicable to real life situations. There are many classes that students take simply because they have to – classes that seem to be full of irrelevant information. Any student, regardless of what their career choice is, can apply the teaching in this class, and because this particular group of students is working toward a degree in business administration, the studies performed in this course should be applicable to them all.
The goal of this paper is to pinpoint and describe the highlights of the course; the main things that were learned, remembered, and taken away to be used in future personal and business endeavors.
My personal highlights of this course are:
1. The Time Value of Money
2. Valuation of Assets
3. Understanding Financial Statements
4. Cash Budgeting
5. Capital Budgeting
The Time Value of Money
The most memorable example of the time value of money was the story of the peasant and the king, where the king asks the peasant, who has just won a chess tournament put on by the king, what he wanted to request as a prize. The peasant asks that the king would simply give his village one piece of grain for the first square on the chess board, two on the second, four on the third and so on. The king, who does not understand the power of compounding interest, agrees, and ends up paying the clever peasant’s village 18.5 million trillion pieces of grain. (Keown)
The time value of money is a key concept to understand in business finance. It is essentially the understanding that money that earns compounded interest, will, over time be worth much more than the original amount, but also that the value of that same amount will decrease in value if it is not invested, due to inflation. This principle will be remembered and used by investing personal income instead of sitting on it, or at least putting it into a money market fund to alleviate the affect of inflation.
Valuation of Assets
Learning to calculate the present value of annuities was the most memorable, because of its relevance to my current internship with Northwestern Mutual Financial Network. The present value of an asset is its current value – what the value of a future payment is today. (Keown)
The formula for calculating the present value is fairly simple and relatively easy to apply: PV=FV[1/(1+r)^n] (Keyes) This concept will be very useful in explaining to clients and potential clients how annuities, stocks, and other relevant assets work. Thanks to what I’ve learned from this section, I will be able to not only explain these questions to help them understand, but can also use this knowledge to help solidify their confidence in my financial abilities.
Understanding Financial Statements
The understanding of financial and cash flow statements was highly memorable to me because it is vital in the analysis of a company. This is important to me because I plan on investing in companies as an “angel investor” when I have sufficient funds.
The income statement is, in its most basic form: sales – expenses=profits. This financial statement shows the profit (or loss) made by the company, and how it made (or lost) that money. It consists of two sections: Operating activities, which are the expenses and income incurred by operating the company, and Financing activities, which represents the expenses and earnings regarding financing (i.e. borrowing money and issuing stock). (Keown) This financial report is regarded highly by entrepreneurs and investors because it shows the profitability of the business, and helps give insight into the credibility and budgeting abilities of the company.
The balance sheet reveals the company’s financial position at a specific point in time, and reports the firm’s assets, liabilities, and equity. This financial statement is very important to investors because it helps them evaluate the company’s equity and credit, and determine whether the company has the ability to take risks, and continue growth.
The statement of cash flows simply states the amounts and specifics of cash inflows, and the amounts and specifics of cash outflows. This report is important because it shows the company’s ability to generate cash. There is a big difference between their ability to raise money, and their ability to generate cash. Raising money can be done by issuing stock, or taking out loans, which are both legit ways to raise money, but involve much more risk and liability than simply having the ability to earn cold, hard cash. The statement of cash flows covers both the inflows from normal operations, and the inflow from financing, as well as sales of company assets such as plant and equipment, and long-term investments. The major advantage of analyzing a company’s statement of cash flows, is the ability to pinpoint and differentiate between the different ways cash is made for the company, as well as where the cash outflow is going.
Because my long-term plans involve running my own business, budgeting is extremely important, not only in managing my business once I start it, but also in managing my assets properly in order to get there to begin with. This section was memorable to me because it provided a good benchmark to measure my current budget against.
Cash budgets are essentially a combination of the financial statements into one detailed document that is not regulated by law, and is made specifically for the company, in order to make financial projections and plan accordingly. This section gives a good Excel template example that can be used to base one’s cash budget off of. The template includes the business relevant aspects of the income statement, the balance sheet, and the statement of cash flows. (Keown)
Perhaps the most difficult to understand, but one of the most interesting topics, was the capital budgeting techniques. The reason that this stuck in my mind is because it is lined up closely with the goals I mentioned previously. I plan on using the techniques taught here to determine which projects to pursue, and which projects to make priority.
Capital budgeting is the evaluation of “profitable projects or investments in fixed assets”. (Keown) For capital budgeting, the items that must be taken into account are: the payback period, the net present value of an investment or project, the profitability index, internal rate of return, modified internal rate of return, and capital rationing.
It can be difficult to find profitable projects, especially in a hurting economy. Capital Budgeting helps in the decision making process by clearly showing (thanks to the items mentioned above) whether the new project should be accepted or rejected, and giving the investor the ability to rank projects accurately. (Keown)
The understanding of the Time Value of Money, the Valuation of Assets, Financial Statements, Cash Budgeting, and Capital Budgeting, will serve as an extremely valuable tool in my future endeavors, and I am grateful to have had the opportunity to learn the concepts involved in this list of highlights.
Keown, Arthur J., John D. Martin, and J. William Petty. Foundations of Finance: the Logic and Practice of Financial Management. 7th ed. Boston.: Prentice Hall, 2011. Print.