Today, finance is an essential aspect of any business and is necessary for making business decisions. Businesses need to know what to spend money on and when to spend it. Hence it is important to understand the fundamental principles of finance and how they relate to the business world. This topic will look at the difference between finance and accounting – yes, they are different. We will also look at the relationship to finance and other managerial functions and the various career options in finance. Finance is an important area for organisational leaders to understand if they make informed decisions in the workplace.
Welcome to Topic 1: Finance and Business. In this topic, you will learn about:
- Concepts of financial literacy
- Business organisations
- Definitions of finance and accounting
- Relationship between finance and other managerial functions
- Career options in finance and related industries.
These relate to the Subject Learning Outcomes:
- Understand the role of the finance and accounting functions in an organisation.
- Identify the terminology and concepts that underlie the preparation of general-purpose financial reports.
Welcome to your pre-seminar learning tasks for this week. Please ensure you complete these before attending your scheduled seminar with your lecturer.
Click on each of the following headings to read more about what is required for each of your pre-seminar learning tasks.
Read Chapter 1 of the prescribed text - Melicher, RW & Norton, EA 2017, Introduction to finance: Markets, investments, and financial management, 16th edn., John Wiley & Sons, Inc.
Read the following journal articles:
- Hung, AA, Parker, AM & Yoong, HK 2009, ‘Defining and measuring financial literacy’, RAND Labour and Population Working Paper Series, RAND
- Lusardi, A & Mitchell, OS 2011, ‘Financial literacy around the world: An overview’, Journal of Pension Economics & Finance, 10(4):205-224
- Lusardi, A & Mitchell, OS 2014, ‘The economic importance of financial literacy: Theory and evidence’, Journal of Economic Literature, 52(1):5-44
Identify the key takeouts from the articles and add these to your reflective journal. You can access the reflective journal by clicking on ‘Journal’ in the navigation bar for this subject.
If you are unsure of any concepts, reach out to your lecturer.
Read the following web articles:
- CFI Education 2015, Accounting vs Finance, CFI Education Inc
- Australia and New Zealand Banking Group Limited (ANZ) 2015, ANZ survey of adult financial literacy in Australia, The Social Research Centre
Read the case study, ‘Personal financial planning: People are the financial systems’ on p. 14 of the prescribed text. Answer the questions from the case study in a new post in the discussion forum, Topic 1, Forum Activity 3: Financial planning.
You can also navigate to the forum by clicking on 'FIN100 Subject Forum' in the navigation bar for this subject.
Read and watch the topic content.
This topic has discussion forum activities, which will enhance your knowledge and give you the opportunity to interact with your peers. You can access the activities by clicking on the following links.
What is financial literacy?
Financial literacy is the capability to understand and apply financial techniques, including personal and corporate level financial management, budgeting, investing, and risk assessment, to achieve a specific financial result. Financial literacy is the foundation of your understanding of any monetary and financial events in this business world, and it is a lifelong progressive journey of comprehension (Australia and New Zealand Banking Group Limited (ANZ) 2015).
According to the Australian Securities and Investments Commission (ASIC) discussion report on Financial literacy in schools (ASIC 2003 pp.10-11 as cited in Schagen 1997), financial literacy is defined as "the ability to make informed judgements and to take effective decisions regarding the use and management of money."
ASIC (2003) identify that the skills and areas of knowledge that are likely to be necessary for financial literature include:
- Mathematical literacy and standard literacy
- Financial understanding
- Financial competence
- Financial responsibility.
Business organisations
There are many different types of business structures that exist, each having its own advantages and disadvantages. Let us look at each of the following to learn more about what they are, why someone would build a business under a particular type over another, and what potential pitfalls these may be.
The most common form of business organisations are sole proprietorships. Within a sole proprietorship, the owner is the sole (only) individual to own and operate the business. This comes with great excitement as they receive all profits and tax advantages, however, it also comes with unlimited liability- to all costs and debts (Gitman & Zutter 2012).
A partnership includes “two (2) or more owners doing business together for-profit” (Gitman & Zutter 2012, p. 8). These partnerships are common in the finance industry and are usually larger than the sole proprietorship. Gitman & Zutter (2012) indicate that partnerships make up about 7 % of all businesses such as public accounting partnerships. A partnership is commonly created by a written contract known as articles of partnership, meaning that all parties involved are legally liable for all of the debt.
The corporation (company) is an established entity created by the law (Gitman & Zutter 2012, p. 7). According to the Australian Government (2021), “a company has the same rights as a natural person and can incur debt, sue and be sued." The shareholders are the true owners of a corporation through equity ownership. They elect the board of directors, which has the ultimate authority to guide corporate affairs and set general policy. Generally, the board of directors takes the responsibility to manage the decision-making process of the company and cooperate with the management to fulfil other operational functions (Gitman & Zutter 2012).
Many of today’s multinational business organisations are corporations, for example, the Microsoft and Apple companies. The global shareholders elect the Board of Directors to oversee management and assure that the shareholders' long-term interests are achieved. The board recognises that the long-term interests of shareholders are developed by taking into consideration the concerns of other stakeholders, including employees, customers, property owners, suppliers, the public, and members of the communities in which Microsoft and Apple Corporation operate. The following table states the advantages and disadvantages of the different business organisations.
| Strengths | Weaknesses | |
|---|---|---|
| Sole proprietorship |
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| Partnership |
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| Corporation |
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What is finance?
Finance is “the research of the capital and assets management process among individual, household, corporate, and government departments," according to the definition from Gitman & Zutter (2012). The finance process or transaction could be seen in the financial sector in a business organisation and every business or commerce-related activity. The allocation and distribution of capital is the central part of this process. The alternative relationship between the present consumption and future investment (connected by saving activity) has been highlighted as the typical finance practice due to the allocation of the fund among different points on the time horizon (Gitman & Zutter 2012). For example, the family has decided to save 30 % of the annual income into a commercial bank account and accumulate to the end of year three (3) to pay the children’s school tuition. On the social level, the understanding of the financial functions from various financial institutions or monetary policymakers will lead to the prime consequences achieved by our national economy. During the age of globalisation, international finance has played a significant role to facilitate international trade between nations and regions. The accelerating power of the financial system could not be ignored by any participating parties.
The general structure of the finance studied in this topic could be illustrated as follows.
The economic environment is the integrated system of different financial components and departments to facilitate the capital flows in the operating economy. This entire picture has been painted out with several essential functionalities, including institutions and markets, investments, and financial management (Gitman & Zutter 2012). All of these three (3) parts will be introduced within various topics about their definitions and practices. There is no absolute boundary to separate them, and the overlapping sections could also be actively operated in our daily business world.
Financial institutions and markets are the main facilities and venues where the financial transactions or processes are officially utilised under the regulation of the legal agency (Gitman & Zutter 2012). The financial market is the exchange medium or system (present time more likely online) to involve participation from the financial institutions. According to different financial functions, the financial market could be further categorised to primary or secondary level, or capital or money markets with the time to maturity of their trading financial instruments, respectively. The financial institution's development is an essential part of the economic revolution after the remarkable industrial revolution in the 19th century. The main period of institutionalised financial services or trading has been centralised in the 20th century in general economic and commercial life. Even the historical root of this movement could be traced back to the early 14th century’s modern commercial banking system operated in Venice and Genoa in Italy.
Financial institutions include:
- commercial banks
- investment banks
- insurance companies
- managed and hedge funds
- private equity and venture capital companies
- the governments' regulatory bodies like central banks and reserve systems.
Investments “involve the sale or marketing of securities, the analysis and valuation of securities and other financial claims, and the management of investment risk through holding diversified portfolios” (Melicher & Norton 2017, p.163). Morden investments are generally fulfilled by massive application of the related financial instruments as common shares, corporate and government bonds, managed funds, or other financial derivatives. The function of investments in a general business organisation is usually exercised together with operational and financing activities. These will mutually maximise the shareholder’s wealth which is the ultimate economic target from shareholders’ perspective.
Financial management is the study of the managerial process on balance sheet-based assets, liabilities, and equity to achieve the operational target of the business (Gitman & Zutter 2012). The financial manager is the central role to decide on the financial management from the business entities. Economic evidence-based activities like capital budgeting, working capital management, and capital structure decision-making are typical examples related to the managerial roles of financial managers. All these financial activities or behaviours should be consistent with the ultimate business target of the company – maximise shareholder’s wealth, and this usually could be perfectly reflected on the market share price with the listed public company.
Financial Institutions and markets, investments, and financial management are not entirely independent processes or facilities conducted by market participators as financial managers, shareholders, debtholders, or regulators (Gitman & Zutter 2012). The successful delivery of one (1) specific function has relied mainly on the solid foundation of the other. For example, the financial manager from Microsoft company has an ongoing financial management project to research and develop the next generation of the mobile operating system. The investments and financing activities are developed to attract sufficient capital from the equity side. Therefore, this activity usually issues extra public shares in the primary market, and the process cooperates with investment bankers, professional accountants, and qualified lawyers.
What is accounting?
Accounting is the process of recording financial transactions, summarising them, and then accurately reporting them (Fernando 2021).
Accounting is a service activity and serves stockholders, management, potential investors, creditors, government, and other users of financial information. This service activity also contains the following characteristics, which are seen as the ‘functions’ of accounting:
- Means of communication
- Supplying information for decision making
- Means of establishing accountability
- Control device.
The process of recording financial and presenting financial information can be classified using the following five (5) branches of accounting:
- Financial Accounting
- Cost Accounting
- Tax Accounting
- Auditing
- Managing Accounting.
Economics, finance, and accounting
Economics is a social science focused on how to maximise the social-commercial output utilities while the input resources are limited. The specific application on the corporate level is how to maximise the value when the contributed capital from shareholders is a fixed amount. Accounting has provided the historical recording system to analyse financially and introduced the related business language to build the communication. Finance, on the other side, has bridged the methodology that the management can connect with their effective decision to achieve the target. In this process, the uncertainty from future volatility has also been integrated into the consideration. Consequently, backward-looking accounting is necessary to learn to comprehend the appropriate choice in forward-looking finance.
Essential concepts and assumptions in finance
To further explore this topic, we will look at several key concepts and assumptions. These include:
- Time value of the money
- Risk and return
- Diversification
- Efficient market.
Time value of the money
The value of $1 today will be worth more than receiving $1 in the future. The time value of the money concept is the fundamental definition of modern finance theory and application. The opportunity cost will be assumed in any capital development scenario due to the appropriate investment opportunity in the open market (Gitman & Zutter 2012).
Example
For example, you have a personal income of $ 1000 today. Any commercial bank savings account would offer a one (1) year deposit rate of 2.2 % per annum. You will open a one-year savings account and deposit the $ 1000 into it. After one (1) year, the withdrawal amount you could access will be $1000 principal plus $ 22 interest so that the total capital will accumulate to $1022. In summary, the $22 interest is the time value of the money, while the commercial bank is a financial institution to apply your saving income during the time of one (1) year.
This example has presented a low-risk investment behaviour like a bank deposit. The higher investment risk-taking will possibly lead to the higher time value of the money regarding your investment.
Risk and return
In general, there is a trade-off relationship between the investment risk and return. According to Gitman & Zutter (2012), "Risk is the uncertainty of the financial outcomes in the future. In modern finance, the risk can be quantified by specific mathematical indicators as variance or standard deviation.” The return is the combination of periodic capital gain and current income for a particular asset (Gitman & Zutter 2012). The higher level of risk-taking investment would possibly generate a higher return as a financial result, but it is not guaranteed. The volatility of future events will allow you to win but also to lose.
Diversification
With an overview of the risk nature, the micro-structures of various risks are not the same. Some risks could be eliminated by the technique ‘hedging’ with other risks, and usually, they are defined as unsystematic risks due to their character and nature. For example, the share price performance of ANZ bank company has its unique features like the quality of the management, the industrial trend, or the technological change on financial services. However, in the same domestic market, other companies share performance that could hedge this risk, for instance, some mining companies always have different share performing patterns in the long period compared with ANZ on the share exchange. This negative relationship will make the technique ‘Diversification’ beneficial from the result by holding them together in the same portfolio.
On the contrary, the un-diversifiable risk is also named systematic risk. The systematic risk cannot be diversified away by holding the domestic portfolio. For example, the foreign currency risk of ANZ’s operation in terms of Australian dollars cannot be hedged away by simply holding the other Australian company in the same collection. The concept of diversification is one of the most essential introductions to the understanding of financial literacy.
Efficient market
The financial markets are assumed efficient and effective in the delivery of information. For example, if the Chief Executive Officer (CEO) has an operation, an efficient share market would see a decline in the share price. The market would convey this information in a timely and complete manner to its shareholders.
The appropriate example will be the reflection of the negative news. Say the Chief Executive Officer (CEO) of a leading technology company has urgent treatment in hospitals, so the company’s operation could be potentially negatively affected by this event. If the share market is efficient, the company's share price will likely decline immediately when a negative event has been happening. The efficient market means the low and cheap level of the transaction costs in the financial trading activities, so the portfolio manager or the market participator on any level can expect the very low elimination of the capital they contribute to the market initially.
Career opportunities in finance
Career opportunities in the field of finance are identified in three (3) major areas:
- financial institutions and markets
- investments
- financial management.
With the rapid growth of global financialisation, the aggregate demand for jobs in these fields has experienced an emerging acceleration in general. Click on each of the following headings to learn more about job demands within the different financial sectors.
There are stable demands from financial institutions and markets side to recruit talented graduates to participate. For example, commercial and investment banks are the conventional recruiters acquiring the graduate talents actively in the job market. Then graduate-level job positions in the banks or saving institutions can be listed as follows. (Gitman & Zutter 2012).
- Branch manager: involves the daily operating of the branch office to serve the retail and wholesale clients, leading or managing the operation and sales teams
- Bank loan analyst or manager: involves investigating, managing, and facilitating the bank loan assets in terms of commercial loans, mortgages, and corporate annuities. Creating and supervising the credit system of the business loans and measuring the financial risk profiles on the client qualities.
- Research analyst: involves the market-based research activities to assistant the investment decisions of banks in the fluctuating financial market. This may require the candidate equipped with professional knowledge and skills about equity and fixed-income markets, portfolio management, and risk assessment.
Some of the popular graduate positions in the investments department:
- Equity investment analyst: involves the research and participation in the equity market especially the share trading market. Advanced analysing skills are required including fundamental analysis, technical analysis, and portfolio management
- Debt or fixed-income investment analyst: involves the research and participation in the bond or short-term money market. Understanding of the debt market analysis like duration management, immunisation, and bond portfolio management.
- Share dealer or broker: involves serving the client investing purpose in the share market by providing buying and selling service as the investment agency.
- A financial planner or advisor: involves serving mainly the individual clients to build their financial portfolios to achieve financial goals like retirement, education, or estate planning (Gitman & Zutter 2012).
Also the graduate positions in the financial management department:
- Financial analyst: involves preparing short-term or long-term financial plans, communicating and educating other departments with the financial comprehension of the corporations.
- Cost analyst: involves cost analysis and management, cost budgeting, cost-volume-price analysis of the corporations.
- Tax analyst: involves corporate taxation management for the employer, personal income taxation management for employees, and other taxation-related consulting activities of the corporations.
- Capital expenditure analyst: involves assessing and measuring the potential valuable project of the company, supporting the decision-making process from the financial manager or general manager with the capital expenditure techniques as Net Present Value (NPV), Internal Rate of Return (IRR), or payback period methodologies (Gitman & Zutter 2012).
Key Takeouts:
Congratulations, we made it to the end of the first topic! Some key takeouts from Topic 1:
- Financial literacy is the ability to understand and apply financial techniques (personal, corporate level, budgeting investing, and risk assessment) to achieve a specific financial result.
- Accounting is the process of recording financial transactions, summarising them, and accurately reporting them.
- The important assumptions of modern finance are:
- Time value of the money
- Risk and return
- Diversification
- Efficient market.
- Careers in finance are diverse and can range from working in financial institutions, investments, or financial management.
Welcome to your seminar for this topic. Your lecturer will start a video stream during your scheduled class time. You can access your scheduled class by clicking on ‘Live Sessions’ found within your navigation bar and locating the relevant day/class or by clicking on the following link and then clicking 'Join' to enter the class.
Click here to access your seminar.
The following learning tasks will be completed during the seminar with your lecturer. Should you be unable to attend, you will be able to watch the recording, which can be found via the following link or by navigating to the class through ‘Live Sessions’ via your navigation bar.
Click here to access the recording. (Please note: this will be available shortly after the live session has ended.)
In-seminar learning tasks
The in-seminar learning tasks identified below will be completed during the scheduled seminar. Your lecturer will guide you through these tasks. Click on each of the following headings to read more about the requirements for each of your in-seminar learning tasks.
Watch the video, izzitEDU 2020, Financial Literacy, izzitEDU, streaming video, YouTube
Working in a breakout room team assigned by your lecturer during the scheduled seminar, discuss the following questions with your teammates. Your lecturer will request that you present the findings back to the class.
- Discuss how important personal financial planning is in your life? Give examples to explain your answer.
- What is your future possible plan for your personal finance within one year? What financial target do you want to achieve?
- Discuss what you know about the general financial world and its functionality? Give examples to explain your understanding.
Working in the same breakout room as previously, visit the Bloomberg Businessweek website and identify a major business development relating to finance or accounting. Write down three (3) keywords in your reflective journal and describe which functionality, related to finance or accounting, the business fulfils in the scenario facilitating this development.
Go to The Wall Street Journal website section, and find information related to job hunting. Write down a job title or position related to the career you want to establish once you graduate. In addition, write one (1) or two (2) paragraphs to express your picture on the requirements of this job. Share this with your peers in the seminar.
Welcome to your post-seminar learning tasks for this week. Please ensure you complete these after attending your scheduled seminar with your lecturer. Your lecturer will advise you if any of these are to be completed during your consultation session.
Prepare a list of key terms with their definitions from this topic and share it in your reflective journal.
Take the following knowledge check quiz during the consultation session. You have only ONE attempt to complete this quiz. Therefore, await your lecturer's guidance as to when to attempt.
You will reflect on correct and incorrect answers and have the opportunity to seek clarification from your lecturer during your seminar.
If you are unable to attend the seminar, you may complete your knowledge check quiz prior to the scheduled seminar and submit any queries to your lecturer, who will aim to resolve them during class. This will be available to you through a recording, once the seminar has finished.
Knowledge check
Complete the following eight (8) tasks. Click the arrows to navigate between the tasks.
Work in a breakout room assigned by your lecturer during the consultation session. Your lecturer will require you to present your findings back to the class. Select one definition from ‘Key Terms’ at the end of Chapter 1 prescribed textbook Melicher, RW & Norton, EA 2017, Introduction to finance: Markets, investments, and financial management, 16th edn., Wiley & Sons, Inc.
Each week you will have a consultation session, which will be facilitated by your lecturer. You can join in and work with your peers on activities relating to this subject. These session times and activities will be communicated to you by your lecturer each week. Your lecturer will start a video stream during your scheduled class time. You can access your scheduled class by clicking on ‘Live Sessions’ found within your navigation bar and locating the relevant day/class or by clicking on the following link and then clicking 'Join' to enter the class.
Click here to access your consultation session.
Should you be unable to attend, you will be able to watch the recording, which can be found via the following link or by navigating to the class through ‘Live Sessions’ via your navigation bar.
Click here to access the recording. (Please note: this will be available shortly after the live session has ended.)
- Economics Media Library, n.d. Economics Media Library
- Fight Finance, n.d. Fight Finance
- Financial Review, Financial Review
- Yahoo! Finance, Yahoo! Finance
References
- Australian Government 2021, Company, Commonwealth of Australia, https://business.gov.au/planning/business-structures-and-types/business-structures/company
- Australia and New Zealand Banking Group Limited (ANZ) 2015, ANZ survey of adult financial literacy in Australia, The Social Research Centre, https://www.anz.com/resources/3/1/31cbc1fd-9491-4a22-91dc-4c803e4c34ab/adult-financial-literacy-survey-full-results.pdf
- Australian Securities & Investments Commission ASIC 2003, Discussion paper: Financial literacy in schools, Australian Securities & Investments Commission, https://download.asic.gov.au/media/1924489/what-do-you-want-to-do-with-fin-lit-schools-dp.pdf
- CFI Education 2015, Accounting vs Finance, CFI Education Inc, corporatefinanceinstitute.com, https://corporatefinanceinstitute.com/resources/careers/jobs/finance-vs-accounting/
- Hung, AA, Parker, AM & Yoong, HK 2009, ‘Defining and measuring financial literacy’, RAND Labour and Population Working Paper Series, RAND
- IzzitEDU 2020 , Financial Literacy – Full video, izzitEDU, streaming video,Youtube, https://www.youtube.com/watch?app=desktop&v=4j2emMn7UaI&ab_channel=izzitEDU
- Fernando, J 2021, Guide to accounting, Investopedia, https://www.investopedia.com/terms/a/accounting.asp
- Gitman, LJ & Zutter, CJ 2012, Principle of Managerial Finance, 13th edn., Prentice Hall.
- Lusardi, A & Mitchell, OS 2011, ‘Financial literacy around the world: An overview’, Journal of Pension Economics & Finance, 10(4):205-224
- Lusardi, A & Mitchell, OS 2014, ‘The economic importance of financial literacy: Theory and evidence’, Journal of Economic Literature, 52(1):5-44
- Melicher, RW & Norton, EA 2017, Introduction to finance: Markets, investments, and financial management, 16th edn., John Wiley & Sons, Inc.
