What Makes Corporate Finance Unique
Corporate finance plays a very interesting role in all societies. Finance is the study of relationships between people: how they distribute themselves and their resources, place value on things, and exchange that value among each other.
Because that’s the case, finance (all finance) is really the science of decision-making. Corporate finance studies decision-making in terms of what is done by groups of people working together in a professional manner.
This definition guides you in two primary directions regarding what makes corporate finance unique:
It tells you that corporate finance is a critical aspect of human life as an intermediary that allows people to transfer value among themselves.
It tells you how groups of people interact together as a single unit, a corporation, and how decisions are made on behalf of the corporation by people called managers.
Corporate finance is far more than a study about money. Money is just the unit of measure people use to calculate everything and make sense of it numerically, to compare things in absolute terms rather than relative ones. Corporate finance is a unique study that measures value. Once you accept that, it becomes apparent that everything in the world has value.
Therefore, you can use corporate finance to measure everything around you that relates to a corporation, directly or indirectly (which, in the vast majority of the world, is everything).
Corporate finance serves as an intermediary
Probably the easiest way to understand how corporate finance acts as a critical intermediary process between groups of people is to look at the role of financial institutions in the greater economy. Financial institutions, such as banks and credit unions, have a role that involves redistributing money between those who want money and those who have excess money, all in a manner that the general population believes is based on reasonable terms.
Now, whether financial institutions as a whole are fully successful in their role or not is no longer a matter of debate: They are not.
The cyclical role being played out time and again prior to the Great Depression, prior to the 1970s economic troubles, and prior to the 2007 collapse are symptomatic of a systematic operational failure yet to be resolved.
For the most part, the role they play is necessary, however. These institutions facilitate the movement of resources across the entire world. They accept money from those who have more than they’re using and offer interest rate payments in return. Then they turn around and give that money to those seeking loans, charging interest for this service.
In this role, financial institutions are intermediaries that allow people on either side of these sorts of transactions to find each other by way of the bank itself. Without this role, investments and loans would very nearly come to a total halt compared to the extremely high volume and value of the current financial system.
Corporate finance plays a similar role as an intermediary for the exchange of value of goods and services between individuals and organizations. Corporate finance, as the representation of the value developed by groups of people working together toward a single cause, studies how money is used as an intermediary of exchange between and within these groups to reallocate value as is deemed necessary.
It may be helpful to backtrack a bit. What the heck is an investment, anyway? An investment is anything that you buy for the purpose of deriving greater value than you spent to acquire it. Yes, yes, stocks and bonds are good examples; you buy them, they go up in value, and you sell them.
A house that you buy for the purpose of generating income is a good example of an investment: You buy it, you generate revenue as its renters pay their rent, and after the house goes up in value, you sell it. (Your own home usually isn’t considered an investment.)
Corporate finance analyzes interactions between people
Because money places an absolute value on transactions that take place, you can very easily measure not only these transactions but also all of several potential options in a given decision. In other words, you can measure the outcome of a decision before it’s made, thanks to corporate finance.
That’s the second thing that makes corporate finance a very unique study: It analyzes the value of interactions between people, the value of the actions taken, and the value of the decisions made and then compiles that information into a single agglomerate based on professional interconnectedness in a single corporation.
This analysis allows you to measure how effectively you’re making decisions and optimize the outcome of future decisions you’ll have to make. The decisions that corporations make tend to have very far-reaching consequences, influencing the lives of employees, customers, suppliers, partners, and the greater national economy, so ensuring that a corporation is making the correct decisions is of the utmost importance.
Corporate finance allows you to do this, so if you have a favorite corporation, hug the financial analysts next time you see them (or maybe just send a cookie bouquet; you might freak someone out if you just randomly starting hugging people).