Michael Taillard - Corporate Finance For Dummies

The nature of banking depends entirely on the type of banking a person does, but there are similar functions between them. Personal and commercial bankers handle the logistics of executing transactions for deposits, loans, some kinds of investments, some kinds of valuations, and so on. An investment banker deals with the logistics of assessing the value of a corporation, making sure the corporation gets paid for its shares, and selling those shares to private investors. Tellers work in banks and simply handle the counting and movement of money between people and/or accounts. Banking, as a whole, is really nothing more than managing basic money needs for others.

“Financial advisors” are not financial experts, despite the word “finance” in the title. It is their role to sell financial products and services, and they earn more money as you make more transactions. There have been attempts to pass a fiduciary rule that would require financial advisors to act in the best interest of their clients, but these attempts have been reversed.

Are you still feeling lost in Finance Land? Have you read this book (and all the other books written by yours truly) and are still feeling like a 2-year-old lost in the mall? Fortunately, you can go to plenty of other places for additional information. But be careful, because Finance Land is filled with people who give terrible advice. Think of this portion of the book as your guide map: It helps point you in the right direction for more exploration.

The Internet, with its seemingly unlimited ability to provide free, reliable information, has become a great resource tool for people involved in corporate finance. However, you have to be careful when using online sources because some of them don’t verify their accuracy, and you definitely don’t want to be misled or lied to. Here are just a few sources you can trust:

EDGAR: This is the SEC’s database website, which provides easy access to a huge number of financial reports by public companies listed in the U.S. Check it out at http://www.sec.gov/edgar.shtml .

Investopedia: This online encyclopedia focuses exclusively on issues related to corporate finance and investing. Go to http://www.investopedia.com for more details.

University websites: Many university websites publish beginner’s guides, course supplements, and other information useful for people with a range of understanding in corporate finance. These resources can be difficult to find on the websites themselves, though, so your best bet is to find them using a search engine. Just type a search for the concept you’re researching; if any of the websites have an .edu domain, then that’s probably a good reference.

Publisher websites: Many book publishers, particularly for textbooks, provide supplementary information and resources on their websites.

A number of different print sources are also available to help you learn more about corporate finance:

Books: The one you’re reading right now is a great place to start! You’ll also find several other books in the For Dummies series. You can also check out some of my other books (search for Michael Taillard). If you’re looking for more, ask your librarian to help point you in the right direction. Particularly, librarians at universities can be extremely helpful because they have lots of books geared to students who are studying the same things as you.

Magazines: CFO, Kiplinger, Global Finance, Public Finance, Money, Strategic Finance, and so many others can be great resources. The topic of corporate finance seems to sell a lot of magazines.

Journals: Academic and professional journals are an amazing source of information and are particularly nice because the work is all peer-reviewed for accuracy and legitimacy. The problem is they also tend to include extremely advanced information — not for the beginner!

Financial reports: All financial reports made by companies publicly listed in the United States are available for free on request or at many libraries.

Finding the right people to talk to about corporate finance can be difficult, especially when the people who talk the most are the ones who know the least and the ones who know the most are the hardest to find. Here are a few tips to help you get the best, most useful information from the finance people you talk to:

Never trust someone giving you a stock tip!

Understand the nature of the person’s job, and if they keep trying to give you information outside of that job, don’t trust them.

Make sure the person you’re talking to has credentials of some sort.

Some people frequently willing to chat who have knowledge of a wide range of finance topics include university professors, CFAs, and CPAs.

Chapter 3

IN THIS CHAPTER

Finding money for your business

Borrowing funds

Selling equity to raise cash

One of the first, and most challenging, goals for a corporation is to acquire things of value, starting with cash. Using that cash, the company then purchases other things such as equipment, supplies, and so on. This chapter explores the different ways that corporations raise money, who the magical money-fairies are, and how to present your story to them in a way that pleases them.

Everything that makes up a corporation and everything a corporation owns, including the building, equipment, office supplies, brand value, research, land, trademarks, and everything else, are considered assets. Believe it or not, when you start a corporation, that company’s assets aren’t just included in a Welcome Letter; you have to go out and acquire them. Generally speaking, you start off with cash, which you then use to purchase other assets. For most new companies, this cash consists of a combination of the following:

The owner’s own money: This money is considered equity because the owner can still claim full possession over it.

Small loans, such as business and personal loans from banks, business and personal lines of credit, and government loans: The money obtained through loans is considered a liability because the corporation has to pay it back at some point. In other words, these loans are a form of debt.

The combination of these two funding sources brings me to the explanation of the most fundamental equation in corporate finance:

Assets = Liabilities + Equity

The total value of assets held by a company is equal to the total liabilities and total equity held by the company. Because the total amount of debt a company incurs goes into purchasing equipment and supplies, increasing debt through loans increases a company’s liabilities and total assets. As owners contribute their own funding to the company’s usage, the total amount of company equity increases along with the assets. Note:Capital, assets, money, and cash are basically all the same thing at this point; after a company raises the original capital, or cash, it exchanges that cash for more useful forms of capital, such as erasable markers.