A company is a collection of assets, but the way those assets work to
create value for customers and profit for a company depends on how
well they are put to work. A company's business model is its plan of action for using
its assets to create cash flow and profit. However, it takes considerable entrepreneurial
and managerial skills to decide how to put assets to their most highly valued use -
to maximize company profitability. Michael Eisner's initial decisions about how to
employ Disney's assets were successful, but his subsequent failures show how complex
and uncertain financial decision making is.
In this chapter, we examine how the activities of the finance function can help a
company make better use of its assets and help secure the capital necessary to purchase
those assets. First, we examine the nature of finance, different kinds of financial
activities, and the way financial analysis is used to maintain and increase the return on a company's capital. Second, we examine issues involved in short-term
and long-term capital investment and budgeting, such as how to best manage working
capital and how to decide which new projects a company should invest its capital
in. Third, we examine the issues involved when companies borrow capital and how
they finance their activities through issuing debt and equity securities can also affect
profitability. By the end of this chapter, you will understand the crucial ways in
which finance helps managers increase a company's value-creation capabilities and
its long-run profitability.
