Foundation of Finance

Foundation of Finance

Finance is the heart of a business. And finance is all about money. No matter what aspect of a business you are looking about strategy, marketing, human relations, or public relations it’s always about the money. In corporate finance you are looking at a business inside out, you are looking at financial decision-making within a business how to run a business well and how do you create value in the business.

There are 6 building blocks in finance you should understand. These are my subjective judgment there might be others who believe there are other building blocks.

1. The Concept and Structure of Business

(Forward-looking, Not backward-looking)

Finance is a very simple and at the same time very complex way of looking at businesses. You’ve got assets and liabilities here. This part is not what you’ve already put into business but what we expect you to make from these assets in the future. It’s always about the future.    

        2. Cash Flows

Finance is all about cash flows. As supposed to accounting, earnings, and book value of assets it’s always about cash flows. Understanding what drives cash flows, why they are different from earnings the different types of cash flows is central to understanding finance.   

        3. Risk

It’s a definition and measuring the risk. And it’s the notion the driving force of risk everything in finance it’s better on measuring risk and making sure you are earning a return that is sufficient given the risk you’ve taken on. In this process you have to define risk, come up with measuring of risk and you have to come up with perspectives on risk.

        4. Time Value of Money

This one is the fourth big idea in finance. A dollar today is worth more than a dollar year from now. Understanding intuition of time values centered also understand why currencies matter and why the time value of money itself might shift across time. 

        5. The Basics of Valuation

This part describes how you value a cash set of cash flows. What are those cash flows contractually set? What if their residual cash flows? what are their contingent cash flows? Understand the basics of valuation.    

        6. Trading Fundamentals

Understand trading is central to finance. In fact, every trader likes to make money without taking any risk and in fact, you’d like to invest no money take no risk and make money that’s called arbitrage. Understanding what makes arbitrage so difficult in markets is again central to thinking about finance.