Intro to Finance

Finance in Business—Discussion Guide

Slide #1 THINK ABOUT IT

Have you ever dreamed of running your own business? You probably have a product and a potential location in mind for your business. But have you considered how you will obtain money to fund your venture, or how you will handle your finances?

KEY CONCEPTS

Slide #2 Finance is the process of obtaining funds and using them to achieve the goals of a business. It includes all issues related to money and money management.

Generally, finance professionals make sure that businesses are using money effectively.

• • They assist with mergers and acquisitions, analyze and manage the allocation of financial capital, create financial models and projections, find ways to increase profitability, and oversee a company’s investments.
  • Without finance professionals, businesses would struggle to make financially smart decisions and to make a profit.

The functions of accounting and finance are interrelated since finance managers depend on the accuracy of accounting information in order to make good financial decisions.

• • Likewise, accountants depend on the decisions made by finance managers so they can handle accounting activities in ways that achieve company goals.

Slide #3 Every part of a company is tied to finance in some way.

Money is needed to buy raw materials to convert them into products, pay for advertising, and maintain and update computer systems just to name a few.

Finance serves many important purposes within a business such as setting and accomplishing future business goals.

• • Finance managers help plan and control a company’s spending by monitoring company spending throughout all its different departments.

Financial managers are responsible for the administration of assets—determining what types of assets the company should own, as well as the proper mix of those assets.

• • They also ensure that sufficient financing is available for the business to run effectively.

Financing is the process of funding a business venture through the acquisition of funds.

• • Finance managers must choose funding that is most beneficial to a company by considering the disadvantages and advantages offered by each type.
  • They must secure funding for all of the business’s project in addition to paying for other liabilities such as debts and taxes.

Finance managers are also responsible for making sure that customers pay their bills and for investing company money wisely.

Slide #4 Finance managers do more than manage money; they manage a company’s working capital.

Working capital is the difference between a business’s current assets and current liabilities.

• • It is essentially the calculation of a company’s balance of what it owns and what it owes.
  • A positive amount of working capital means that a company has more than enough short-term (liquid) assets to cover its short-term liabilities.

The decision-making that surrounds keeping these short-term assets and liabilities in balance is called working capital management, and it is primarily focused on the management of accounts payable, accounts receivable, inventory, and cash.

A key component of managing working capital is the cash conversion cycle, which refers to the number of days that pass after a company has purchased raw materials, created products, sold them, and received payment.

• • Keeping the cash conversion cycle as short as possible helps a company create a positive cash flow that makes it easier to conduct business.

Another key component of managing working capital is referred to as return on capital.

• • Return on capital measures how well a business generates cash flow in relation to the capital (both debt and equity) it has already invested in itself, and it is usually expressed as a percentage.
  • By making sure that return on capital is positive, finance managers are able to help a company grow in value.

Slide #5 Capital investment decisions are made for the long term and determine a company’s major projects, how to finance them, and whether or not to pay dividends to the company’s shareholders.

These decisions are referred to as the capital budgeting process and the first step is evaluating a project’s potential ability to produce profit.

• • Then, finance managers determine how to fund the project by identifying the best use of existing equity (cash and assets) and whether or not to incur debt by obtaining business loans.
  • When finance managers fund a project, they are trying to create an “optimal mix” of financing (debt and equity) to create a capital structure for the company to operate within.
  • The final step of the capital budgeting process is determining how a company will handle its profits.
    • A company has to decide whether or not to pay dividends to its shareholders and, if so, when and how much.
    • It also must decide whether to pay them in the form of cash or in the form of stock.
    • When a company does not pay dividends, it must decide whether to finance new projects or to reinvest in existing ones.

Ethics in Finance—Discussion Guide

Slide #1 THINK ABOUT IT

Finance professionals manage a business’s money. It’s important for them to follow ethical practices because people inside and outside the organization rely on them to do what is right.

KEY CONCEPTS

Slide #2 Finance professionals participate in a lot of important decision-making.

They assist with mergers and acquisitions, analyze and manage the allocation of financial capital, create financial models and projections, find ways to increase profitability, and oversee a company’s investments.

Ethics, the basic principles that guide behavior and help people determine right from wrong, are incredibly important in finance because of the damaging effects that unethical financial practices can have on companies, their employees and customers, and the economy as a whole.

Finance professionals can face a wide range of ethical dilemmas, including:

• • Telling the truth vs. saying what employers want to hear
  • Feeling pressured to support certain business decisions
  • Attempting to increase profits in ethically questionable ways
  • Overstating projections or tweaking analyses that cause problems in the future

Slide #3 Finance professionals behave unethically for many reasons, including:

Slide #4 Finance professionals can help ensure workplace behavior remains ethical by:

Recognizing and developing ethical traits

• • Financial institutions often provide employees with a code of ethics to guide workplace conduct and inform employees about the ethical traits of:
    • Fairness—avoiding conflicts of interest
    • Competence—being good at your job
    • Confidentiality—keeping information private
    • Integrity—maintaining honesty
    • Diligence—being careful and persistent
    • Self-regulation—monitoring your own work
    • Transparency—disclosing information
    • Compliance—following the rule of law

Assessing rationalization

• • Rationalization is how people justify their actions, especially when there is a conflict between what they should do and what they actually do.
  • Finance professionals need to think about the motivations for their actions and avoid situations where they find themselves rationalizing behavior that may be unethical.
  • If it is difficult to determine whether an action is ethical, finance professionals should try to fairly assess the factors contributing to this difficulty.

Voicing concerns

• • Finance professionals need to speak up when they feel that something unethical is occurring.
  • First, they should talk to the people directly involved in the unethical situation and try to communicate any concerns.
  • Providing counterpoints to the defense or rationalization of unethical behavior might help stop the behavior right away.

In some cases, though, the next step is to raise these concerns with a higher level executive or supervisor, an ethics hotline, or the authorities(if a law is being broken).

Discussion #2: Ask students if they have ever seen unethical behavior happening. Did they voice their concerns? If so, to whom? How did they choose to whom to voice those concerns?

Legal Considerations for Finance—Discussion Guide

Slide #1 THINK ABOUT IT

Many millions of people depend on the honesty of finance professionals and the accuracy of their work. The actions of just a few bad actors could throw the entire world into crisis. That’s why laws exist to ensure these important tasks are performed correctly.

KEY CONCEPTS

Slide #2 Over the course of the 20th and early 21st centuries, a number of U.S. laws have been passed in response to instances of mismanagement and fraud in publicly traded companies and financial markets.

Many of these events have had significant and devastating impacts on the national and global economy.

Due to an increasingly interconnected world, financial regulation is one of the few safeguards against the devastating world-wide impact of fraudulent financial practices.

Slide #3 A number of important laws that date back to the Great Depression continue to lay the groundwork for the reporting requirements and regulations that protect investors by mandating the public disclosure of financial information.

The Securities Act of 1933 was passed in response to the stock market crash

of 1929.

• • Its goal was to ensure that the financial information provided to investors was complete and accurate. It requires that all securities (stocks, bonds, options, etc.) that are offered for sale in the United State be registered with the federal government.
  • This registration includes the certification of financial statements by independent accountants/auditors.

The Securities Exchange Act of 1934 (sometimes called the Exchange Act) created the Securities and Exchange Commission (SEC) and granted it with regulatory powers and oversight of the securities industry.

• • Under this law, the SEC is given the authority to require all publicly traded companies to regularly report financial information.
  • The law also creates restrictions on “insider trading” which is the trading of securities based on information or knowledge that has not been made public.

One way to understand the difference in the purpose of these laws is to look at their names.

• • The Securities Act of 1933 establishes guidelines for the issuance and registration of securities.
  • The Securities Exchange Act of 1934 regulates the exchange (purchase and trade) of securities.

Slide #4 Almost 70 years later, the Sarbanes-Oxley Act of 2002 was passed to update the regulations established by the Securities Exchange Act of 1934.

This law, also known as the SOX Act, was passed in response to a number of finance scandals involving fraudulent accounting and financial reports from major U.S. companies.

• • The deceptive accounting practices and financial reports of a few major companies had caused a significant disruption in the markets in the early 2000s.
  • Investigations led back to high-level executives who had engineered schemes to make these companies appear more profitable than they were.
  • These scandals exposed the need for added regulation to hold corporate executives accountable for deceptive accounting and reporting practices in their companies.

Among many other things, the SOX Act requires corporate executives (such as the CEO or CFO) to review all of the financial statements and reports that their company produces and holds them accountable for establishing internal controls for their companies.

• • This central component of the SOX Act makes it impossible for these executives to claim ignorance of any accounting or reporting fraud that takes place within their companies.
  • It also establishes that the executives who do approve of these reports are subject to strict penalties including imprisonment.

The SOX Act also establishes guidelines for storing financial records and strict punishments for falsifying or destroying them.

It also adds protections for whistleblowers who report fraud or testify against their employers in fraud cases.

Discussion #1: Ask students if it is fair to require executives to be responsible for the work of their accountants. Why or why not?

Slide #5 In addition to regulations on financial reporting, Securities and Exchange Acts protect investors in the event of the purchase or transfer of securities. A major aspect of these regulations cover mergers and acquisitions.

Mergers and acquisitions (M&A) refers to a group of transactions involving the combination of companies or company assets.

• • They are regulated by both federal and state laws.

For example, the Securities Exchange Act of 1934 establishes that anyone attempting to purchase more than 5% of a company’s securities must disclose all relevant information so that shareholders can make informed decisions about how such an event could affect their investment.

• • The offer to make a purchase of this size is called a tender offer, and is usually intended as a way to purchase a controlling interest in the company.

Slide #6 Occasionally, laws are passed to loosen finance regulations as well.

In response to decreased numbers of small businesses after the 2008 financial crisis, the Jumpstart Our Business Startups (JOBS) Act was passed in 2012.

• • Its goal was to encourage small-business growth by relaxing some of the regulations on raising capital for small businesses.
  • The JOBS Act allowed small businesses to conduct an IPO with less gross revenue than previously allowed.
    • A small business conducts an initial public offering (IPO) when it issues new securities and offers them for sale to the public, moving from a private company to a public one.
  • The JOBS Act eased restrictions on when a company can issue an IPO in addition to how long a newly public company has before it must comply with certain areas of the SOX Act.
  • It also allowed small businesses (called “emerging growth companies” in the Securities Act) to raise capital through investments from small, individual investors through crowdfunding.

For more information on the JOBS Act, click here: https://www.investopedia.com/terms/j/jumpstart-our-business-startups-act-jobs.asp.

Discussion #2: In the article above, there is a distinction between donation-based crowdfunding and investment-based crowdfunding. Ask students to discuss the difference between getting a discount on an item from donation crowdfunding and receiving dividends from investment crowdfunding. Why would the JOBS Act only discuss one kind of crowdfunding?