Are you interested in understanding the necessary skills for a successful career in corporate finance? Would you like to know more about capital markets beyond the stock market? Maybe you want a basic knowledge of financial terms and concepts. Whether you are considering an education or career in finance, or simply want to expand your knowledge on the subject, this introduction to finance will provide the information for which you are looking. Spend 15 minutes reading through the topics, or take up to 3 hours digging deeper into each section in this overview of finance.
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Table of Contents
Section 1: Foundations of Financial Management
What is Finance?
Finance is generally defined as the management of money. This includes activities such as investing, lending money, borrowing money, budgeting, saving, forecasting, and more. Here are some examples of the types of activities that define finance:
- Determining a savings plan and the types of investments that best fit your financial goals
- Using Microsoft Excel to build a three-statement financial model for a publicly-traded company
- Creating a forecast for government spending and revenue collections
The finance industry can be broken down into three main types: personal, corporate, and public/government.
The first is personal finance. Personal finance is the process individuals go through planning and managing their financial activities. Think about a family planning out a monthly budget or financial plan. The main categories that define personal finance are income, spending, saving, investment, and protection.
The second is corporate finance. Corporate finance deals with the financial activities of running a corporation. Think about a company deciding what new products or projects to invest in, and how to best fund them. Corporate finance relies on focused planning and analysis activities to maximize the value of the business.
The third type is public or government finance. Public finance involves the financial activities of a country. These are things like taxes, government spending and budgeting, and resource allocation.
This introduction to finance will focus on corporate finance. Be sure to explore the resources below if you are interested in learning more about personal or public finance.
What do you think?
Which category of finance most interests you: personal, corporate or public finance?
Additional Resources for Foundations of Financial Management
Section 2:Corporate Finance
As defined above, the primary focus of corporate finance is the financial activities of a company and how to maximize shareholder value. What exactly are those activities and why are they so critical to understand? Here is a list of the top three most important activities that shape the corporate finance industry:
- Capital Budgeting and Investments – The process of capital budgeting includes determining where to invest long-term capital assets to generate the greatest risk-adjusted returns.
- Financing – After identifying where to invest capital assets, businesses must analyze how to best finance these investments. A business has access to various sources of capital including debt, equity, or a combination of both. Balancing these sources must be closely managed to avoid taking on too much debt or diluting earnings for shareholders.
- Capital Returns – Corporate managers must make decisions about retaining earnings for future investments or distributing earnings to investors. Determining how and when to return capital to investors requires a clear understanding of future capital requirements and funding sources.
Capital Structure
All the activities listed above influence the capital structure of a company. A company’s capital structure is the combination of debt and equity that make up the finances of a company. Maintaining an appropriate capital structure is crucial to achieving the goals of corporate finance. This balancing act of debt and equity is crucial to maximizing the value of a business. It is also a key indicator of how risky or well-balanced the company’s financing is.
Key Skills Required in Corporate Finance
Corporate finance relies heavily on financial analysis and evaluation. Here is a list of five skills that are common among those who are successful in the field:
- Problem-Solving – Corporate finance professionals face a variety of complex situations that require the ability to quickly and efficiently problem solve.
- Adaptability – Situations can change rapidly and having the ability to adapt and overcome will is a highly-valued skill in this industry.
- Analytical Abilities – Dealing with financial analysis, modeling, and valuation involves technical aspects that require proficiency and confidence with numbers.
- Diligence and Attention to Detail – Nearly all aspects of corporate finance require careful inspection and detail.
- Written and Verbal Communication – Being able to clearly communicate analysis and findings is key for informing decision-makers and building trust.
What do you think?
What skills do you have that would make you successful in a corporate finance career?
Additional Resources for Corporate Finance
- Introduction to Corporate Finance – NYU Stern
- Learn Corporate Finance with Online Corporate Finance Courses – edX
- Introduction to Corporate Finance-CFI Free Course
Section 3: Financial Statements
Financial statements are formal records of financial performance and business activities of a company. Investors and finance professionals use financial statements to assess financial health, valuation, and earnings potential of a company. The three fundamental financial statements are the: 1.) income statement; 2.) balance sheet; and 3.) statement of cash flows. Let’s take a deeper look at each one of these statements and their purpose.
The Income Statement
The income statement is a financial report that depicts the operating performance (i.e. revenues less expenses generated – i.e. profitability) over a certain period (usually a month, quarter, or year). The income statement is critical because it facilitates analysis of a company’s potential growth, overall cost structure, and profitability. Financial analysts can use the income statement to identify the key components and drivers of net earnings.
The Balance Sheet
The balance sheet is a financial report that identifies a company’s assets (resources) and how those assets are funded (i.e. liabilities and shareholder’s equity) at a specific moment (end of month, quarter, or year). The fundamental accounting equation that defines the balance sheet is Assets = Liabilities + Equity. Financial analysts can use this statement to understand the financial position of a business at any given time.
The Cash Flow Statement
The cash flow statement reconciles net income from the income statement to a company’s actual change in its cash balance over a period. The cash flow statement provides insight that the income statement or balance sheet alone cannot – specifically how much cash is generated and from what activities. This is important because a company may show high profitability on the income statement, but it is running out of cash because significant revenues recognized were noncash.
What do you think?
How are financial statements useful to managers and employees?
Additional Resources for Financial Statements
Section 4: Key Financial Terms and Ratios
Finance Key Terms
Assets – Resources with economic value that a company owns with the expectation of producing future value or benefits.
Liabilities – Financial obligations of a company that will result in future economic payments or sacrifices.
Accounts Payable – A liability account that represents money owed to creditors for products or services already received by the company.
Accounts Receivable – An asset account that represents money due to the company for products or services already provided to customers.
Revenue – Income generated from normal business operations and can be found at the top of the income statement.
Working Capital – Capital a company uses for day-to-day operations. It is calculated as current assets minus current liabilities.
Cash Flow – Any increase or decrease in the amount of money a company has. There are several types of cash flows, so it is critical to understand each one. These include Cash Flow from Operating Activities, Free Cash Flow to Equity, Free Cash Flow to the Firm, Net Change in Cash.
Gross Profit – Revenue minus the cost of goods sold (COGS). Gross profit generally does not include fixed costs such as rent, advertising, salaries, and more.
Net Income – The amount of accounting profit a company generates after paying all expenses.
EBITDA – Earnings before interest, taxes, depreciation, and amortization. EBITDA is a measure of profitability and sometimes used as an alternative to net income.
Most Common Financial Ratios
Net Profit Margin – Net profit margin is the percentage of profit (net income) a company generates as a percentage of its total revenue. The formula is: Net Profit Margin = (Net Profit / Total Revenue) x 100
Earnings per Share (EPS) – EPS indicates a company’s ability to generate profits for shareholders. The general formula is: EPS = (Net Income – Preferred Dividends) / (Weighted Average Shares Outstanding)
Price-to-Earnings (P/E) Ratio – P/E ratios represent the price investors pay for each share of a company relative to the company’s earnings. Investors commonly use this financial ratio to determine relative valuations when comparing companies or industries. The formula is: P/E Ratio = (Market Value Per Share) / (Earnings per Share)
Return on Equity (ROE) – ROE measures how well a company uses its equity to generate profit. ROE is used for comparing the performance of different companies in the same industry. The formula is: ROE = (Net Income) / (Shareholder’s Equity)
Debt-to-Equity (D/E) Ratio – This ratio indicates the relative proportions of debt and shareholders’ equity used to finance a company’s assets. It is used to evaluate the level of leverage (debt) a company has and asses risk. The formula is: D/E Ratio = (Total Debt) / (Shareholder’s Equity)
What do you think?
Which financial terms/ concepts do you want to learn more about?
Are there any financial terms you think are imperative to understanding corporate finances?
Additional Resources for Financial Ratios and Key Terms
Section 5: Capital Markets
What are Capital Markets?
Capital markets, sometimes broadly referred to as financial markets, are places that connect people and entities with capital (or “money”) with people and businesses who need it. Think of a stock market. In a stock market, investors provide capital to a business in exchange for shares or ownership. A stock market is a source of capital for an entrepreneur who needs money to start a new business or an established business that wants to expand. Other types of capital markets include bond markets and commodity markets. In each of these markets, investors purchase and sell securities.
Types of Capital Markets
There are many types of capital markets. Most people think of markets such as the NASDAQ or New York Stock Exchange. Both are examples of equity capital markets. Here is a shortlist of the most common types of capital markets:
- Equity Markets – Also known as stock markets, equity capital markets function with investors trading capital for ownership in a company. The company receives money to spend on operations and growth in exchange for this ownership.
- Bond Markets – In bond markets, investors lend money to companies or institutions in exchange for a promise to be repaid their capital plus interest.
- Commodities Markets – A commodities market is a place where investors can buy materials and goods (i.e. crude oil, sugar, cattle) or speculate on their future price.
- Currency Markets – In currency markets (also known as the foreign exchange market, forex, or FC), investors buy, sell, and exchange different types of global currency (i.e. dollars, pounds, euros).
What do you think?
Which type of capital market would you like to know more about?
Additional Resources for Capital Markets
Section 6: Investment Management
Investment management is an area of finance that deals with helping clients achieve investment goals by overseeing financial assets and investments. Investment management can also include other services such as banking, tax services, or budgeting.
Responsibilities of Investment Managers
An investment manager has significant responsibility in investing and divesting (or “buying” and “selling”) assets on behalf of a client. Key responsibilities include asset allocation, returns, and diversification. Some key concepts investment managers focus on are portfolio optimization, the relation between risk and return, and investing strategies (i.e. value, growth, or momentum investing).
Top Investment Management Funds
BlackRock, headquartered in New York City, is the world’s largest investment manager with over USD 6.5 trillion of assets under management (AUM). Here is a list of the top 10 investment managers based on AUM according to ADV Ratings:
| Rank | Company | Country | Total AUM, US$b | Balance Sheet |
| 1 | BlackRock | US | $6,520 | 3/31/2019 |
| 2 | Vanguard Group | US | $5,600 | 4/30/2019 |
| 3 | UBS Group | Switzerland | $3,256 | 3/31/2019 |
| 4 | State Street Global Advisors | US | $2,805 | 3/31/2019 |
| 5 | Fidelity Investments | US | $2,700 | 3/31/2019 |
| 6 | Allianz Group | Germany | $2,357 | 3/31/2019 |
| 7 | JPMorgan | US | $2,096 | 3/31/2019 |
| 8 | Capital Group | US | $1,859 | 3/31/2019 |
| 9 | Bank of New York Mellon | US | $1,841 | 3/31/2019 |
| 10 | PIMCO | US | $1,760 | 3/31/2019 |
What do you think?
Which responsibility of an investment manager is most appealing to you?
Which top investment manager would you like to know more about?
Additional Resources for Investment Management
- World’s Top Asset Management Firms 2019 – ADV Ratings
- Investment Management: What Is It? – NerdWallet
- How to Make a Profit While Making a Difference (TED Talk)
- The Investment Logic for Sustainability (TED Talk)
Section 7: Valuation
Answering the basic question of “what is a business worth?” is fundamental in finance. Broadly speaking, valuation is the process of determining the value of an asset. Valuation is by no means an exact science. Valuation is, however, a pre-requisite for smart investing and used in nearly all areas of finance.
Valuation in Use
Investment Banking – How much should a client pay for a target? How much can a client receive for the sale of a target? How much should we sell shares for in an IPO?
Private Equity and Venture Capital (PE/VC) – How much are we willing to pay for this investment?
Hedge Funds, Asset Management, and Equity Research – Given a valuation, should our clients buy, hold, or sell positions in the given security?
Corporate Finance – How do we enhance the value of our company? How will various operating, financial, and investment decisions affect the value of the company?
Valuation Methodologies
In general, there are two methods for valuation – intrinsic and relative. Intrinsic valuation (also known as absolute valuation) relies on the economics of a business (i.e. firm cash flows, growth potential, and risk). Relative valuation considers how the market prices similar assets.
Intrinsic Valuation
Simply put, intrinsic valuation represents the price a rational investor is willing to pay for an asset given the asset’s risk level. In intrinsic valuation, the price of an asset is determined by the present value of the asset’s future cash flows. The most common type of intrinsic valuation is known as a discounted cash flow analysis.
Relative Valuation
Relative valuation uses comparative reasoning to try and establish the value of a business based on the value of industry peers. The two most common types of relative valuation models are comparable company analysis and precedent transaction analysis.
What do you think?
Why is valuation important in finance?
Additional Resources for Valuation
- The Basics of Business Valuation – Duff & Phelps
- Warren Buffett Explains How to Calculate the Intrinsic Value of a Stock – YouTube
- CFI Valuation Methods
Section 8: Financial Modeling
The Basics
Financial modeling is the process of building tools (i.e. financial models) to project a business’s future financial performance. Financial models are typically built with Microsoft Excel and use historical performance and assumptions to make projections about future financial performance.
What is Financial Modeling Used for?
Finance professionals use financial models for decision making and financial analysis. Decision-makers (both inside and outside of companies) rely on analysis from financial modeling to inform strategic decisions. Some examples of strategic decisions that rely on financial modeling are capital raising, making acquisitions, opening new stores, entering new markets, selling assets or whole business units, budgeting, and valuation.
Top 3 Types of Financial Models
There are many types of financial models and there is no set format to create a financial model. Models are generally created for valuation but are also used for predicting risk, evaluating trends, and understanding performance. Different types of financial models can be created depending on the analysis requirement. Despite this, here are the top three most common types of financial models:
- Three Statement Model – This is the most common and basic setup for financial modeling. This model links the three financial statements (income statement, cash flow statement, and balance sheet) to highlight how key assumptions can drive change.
- Discounted Cash Flow (DCF) Model – A DCF model projects future cash flows of a firm to calculate an intrinsic value. This model is commonly used in equity research and investment banking.
- Leveraged Buyout (LBO) Model – An LBO is the acquisition of a company with a significant amount of debt. An LBO model is used in this scenario to project debt schedules and cash flow waterfalls. This is an advanced model and primarily used by specialized private equity and investment banking firms.
What do you think?
Why do you think financial modeling is useful?
Additional Resources for Financial Modeling
- Business and Financial Modeling (Wharton Online)
- The Ultimate Guide to Financial Modeling for Startups – EY
- CFI Types of Financial Models
Section 9: Careers in Finance
There are many career paths available to those looking to pursuing finance. Finance professionals can choose from different areas of focus to find the best fit for their interests, skills, and long-term goals.
Corporate Finance
Careers in corporate finance focus on helping companies make the correct financial investments to reach their maximum potential. Corporate finance professionals analyze revenues and expenses, evaluate new project opportunities, and structure merger and acquisition deals.
Common corporate finance job titles include financial analyst, corporate development officer, treasurer, and chief financial officer.
Capital Markets and Investment Banking
Working in capital markets requires deep analysis and understanding of both market and economic factors to assist companies with making correct investment choices. This includes helping companies raise capital from institutions and investors.
Careers in investment banking involve advising companies on overall finance needs and strategy. Both career paths are demanding and complex but offer significant rewards for compensation and professional growth.
Becoming a designated Chartered Financial Analyst (CFA) or pursuing a Master of Business Administration is something to consider for those considers a career in these highly competitive fields.
Common job titles in capital markets and investment banking include investment banking analyst, investment banking associate, equity capital markets officer, debt capital markets officer, financial strategist, and mergers & acquisition analyst.
Commercial Banking
A commercial bank is a financial institution that provides monetary services to individuals and businesses. While tellers handle the day-to-day transactions, commercial bankers work directly with corporate clients to provide financial advice and services on behalf of the bank. Commercial bankers are responsible for establishing relationships with clients and creating more accounts. This type of career focus is great for skilled communicators and those who enjoy working with other people.
Common commercial banking job titles include credit analyst, branch manager, mortgage banker, cash management specialist, private banker, and commercial lender.
Financial Advisor
Being a financial advisor is incredibly rewarding for those who enjoy helping others achieve their goals. Financial advisors assist clients with planning for their goals and crafting the appropriate financial strategy to achieve them. In addition to analyzing asset allocations and picking stocks, a successful financial planner can build and maintain positive relationships. This career path is an excellent choice for someone who is seeking the technical aspects of finance alongside the personal aspects of being a trusted advisor.
Common job titles for financial advisors include financial planner, trust officer, account executive, retirement plan specialist, and portfolio manager.
What do you think?
Which financial career path do you see for yourself?
Additional Resources for Careers in Finance
- Career Map – Explore our Interactive Corporate Finance Career Map – CFI
- How to Become a CFA Charterholder – CFA Institute
Section 10: Typical Finance Courses
Corporate Finance: This course introduces corporate finance fundamentals and provides a framework for analyzing financial decision making. Topics include the time value of money, capital budgeting, valuation, and risk and return relationships. Students learn how to apply these fundamentals to real-world corporate situations.
Financial Accounting: This course provides students with an understanding of financial accounting fundamentals and how to consume corporate financial information. Students learn how different economic events (corporate investments, transactions, operating activities) are recorded in firm financial statements.
Macroeconomics: This course provides a foundation to recognize and understand high-level movements in the global economy. Topics include monetary and fiscal policy, business cycles, national income accounting, employment, and international finance.
Investment Management: This course teaches students the concepts and information related to investment portfolio management. Topics include portfolio optimization, diversification, asset allocation, risk-return relationship, active vs. passive management strategies, mutual funds, and performance evaluation.
Financial Modeling: This course introduces students to financial modeling techniques and applications. Students gain exposure to modeling frameworks (typically with Microsoft Excel), best practices, forecasting techniques, error checking, and basic discounted cash flow analysis.
Capital Markets: This course provides students with an overview of different instruments traded in financial markets, mechanisms that facilitate trading, and motivations for issuers and investors. Topics include the design, issuance, and pricing of financial instruments, arbitrage strategies, and performance evaluation.
Additional Resources for Typical Finance Courses
- Why You Should Study Finance – HBS Online
- 7 Non-Finance Courses Finance Students Should Take – Investopedia
- Best Online Courses in Finance
Section 11: Types of Finance Degrees
Associate Degree in Finance
An associate degree in finance is a two-year program that introduces you to the foundations of finance. This is a 60-credit program and is a great option for students if they have plans to transfer into a bachelor’s degree program eventually. This degree will qualify recipients for entry-level positions such as a financial clerk or bookkeeper.
Bachelor’s Degree in Finance
A bachelor’s degree in finance is typically a four-year program and a minimum of 120 credits. Earning a bachelor’s degree in finance will expose you to key concepts in banking, finance, accounting, and economics. This degree will qualify recipients for mid-level positions such as financial analyst, financial planner, or credit analyst. Most industry certifications, such as Chartered Financial Analyst and Certified Financial Planner, require a bachelor’s degree to apply.
Master’s Degree in Finance
There are several types of finance master’s degree programs. The two most common are the Master of Finance and Master of Business Administration. The primary difference between the two programs is the breadth of focus. A Master of Business Administration provides broad exposure to finance, accounting, markets, entrepreneurship, and management. A master’s degree in finance is a more focused alternative, with greater emphasis placed on topics such as financial theory, investment, market, mathematics, and quantitative topics.
Ph.D. in Finance
A Ph.D. in finance is for those students looking for highly specialized research and training in economics, business management, corporate finance, or international finance. This degree prepares students for careers as researchers and professors at the highest level of institutions.
Additional Resources for Types of Finance Degrees
- Best Undergraduate Finance Programs – US News Rankings
- MBA vs. Master of Finance: What’s the Difference? – Investopedia
- Best Online Masters in Finance
Andrew Ziebarth
Master of Business Administration (M.B.A.), Finance | University of Pennsylvania – The Wharton School
United States Military Academy at West Point
May 2020
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