Corporate Finance: Learn this Simple Guide in One Hour

We're going to assume that this is your first exposure to finance, so while reading this blog article, no prior knowledge of corporate finance will be required. 

If we could describe corporate finance in just a few words, then we'd say something like this:

"Finance is a discipline that deals with the management of all things CASH."

This includes raising it, spending it, protecting it, and investing it. As you can probably guess, cash is a REALLY big deal in the world of corporate finance. It's at the heart of whatever financial analysis you're doing. 

Accounting and Finance is terminology that is often used interchangeably. However, they're not the same thing. Accounting deals with business transactions, which are the activities associated with buying and selling of goods and services. 

Accounting processes, records and reports these transactions to stakeholders. Be they management, or external stakeholders like investors, analysts, or tax authorities. Accounting tends to be backward looking in it's orientation. 

While accounting tends to be backward looking to ensure the numbers are correct, finance on the other hand is always looking forward. Financial analysis more often than not, supports management decision making. 

Matters pertaining to corporate finance have direct implications on the creation of shareholder value.

The creation of shareholder value is considered to be the holy grail of finance. Shareholders are those individual owners of a business. They are the people who invest their savings on the expectation of generating an investment return. In other words, if you buy common shares in a company like Apple or Microsoft, you'll hope that the value of your shares will eventually appreciate. 

However, as sexy as it is to be a shareholder and tell all of your friends at cocktail parties that you're an owner of Apple shares. Keep in mind that as an owner, you hold the most risky investment position in the company. 

The reason for this is because shareholders represent a Residual Interest. In the event of liquidation of a company, shareholders ALWAYS get paid last. 

Here's an interesting fact:

If you believe liquidation is only a remote possibility, then keep in mind that of the 100 largest companies 100 years ago, only 18 of them still exist today. Some of which include the following:

1. Coca-Cola
2. JCPenney
3. UPS
4. Boeing
5. LLBean
6. Harley-Davidson
7. Kraft Foods
8. Kellogg's
9. Equifax
10. and Target just to name a few...

These are people who have a claim against specific assets. In the event of liquidation of a company, creditors ALWAYS get paid first. 

Then, there are priority payables to such creditors as the government and employees.

Then, there are the unsecured creditors, like the suppliers. The list of creditors then continues to go on-and-on.

If the company makes no money, then the shareholders stand to loose the value of their investment. However, if the company becomes successful, the advantage of being a shareholder with a residual interest means that all of the upside is yours.