The principles of corporate finance affect every decision maker in a corporation, whether they're making high-level calls on acquisitions or investments, or choosing a vendor to service the soft-drink machine in the break room. Managers often must implement and explain those decisions to the people who report to them. Understanding corporate finance gives managers the information they need to inform and motivate.
Everything Costs Money
In simplest terms, corporate finance refers to how businesses earn money and how they spend it. Managers at every level are involved, even if only indirectly, with both of those activities. So, their effectiveness depends to some extent on their grasp of finance. Aswath Damodaran, a professor of finance at New York University, summarized the issue succinctly when he said, "Any decision that involves the use of money is a corporate financial decision." Deciding whom to hire, fire and promote, setting price levels, establishing production schedules, even ordering office supplies impacts a company's bottom line. Managers must understand how corporate finance affects their department, and how their department affects their company's finances.
Explaining Corporate Decisions
When the people who work under a manager ask, "How can we afford to remodel the office when we're understaffed," or, "Why didn't we get raises after we posted a profit," the answers are rooted in corporate finance. The manager who understands that can provide explanations his people will accept. For example, he can explain how capital expenses (renovations) and operational expenses (staffing) are considerably different. He can demonstrate why profit doesn't necessarily alter cash flow. The subordinates may not be happy with the answers, but reasonable explanations can remove some of the mystery from corporate decisions, and, perhaps, reduce frustration.
What's In It for the Workers
Managers with a strong grasp of finance may be better positioned to motivate their workers by clarifying how they can benefit if the company thrives, and, in turn, how the work they do can contribute to the company's success. In the textbook titled, "Financial Accounting for MBAs," the authors detail numerous ways in which a manager can use financial information to empower employees. For example, managers who can explain the nuances of stock options, profit-sharing plans, RSUs and 401 (k) programs can employ those benefits as motivational carrots. Teaching employees how to analyze the company's financial condition can prepare them when it comes time to discuss compensation. Managers also can use financial data to set clear, realistic goals that will make sense to everyone under them.
Understanding the Objectives
Ultimately, it's a manager's job to help the company achieve its objectives. As Professor Damodaran points out, for most enterprises that boils down to maximizing the value of the firm. Others describe the company's prime goal as "maximizing shareholder value." Whatever the stated objective, the metrics for achieving it will almost always be expressed in the language of corporate finance -- net income (profit), free cash flow, shareholder equity, dividends returned to shareholders, and so on. Managers who speak that language fluently can better gauge whether their decisions drive the company forward toward the goal or push it sideways or even backward.
- New York University: Introduction to Corporate Finance
- National Center on Nonprofit Enterprise: Financial Management For All Senior Managers? Why This?
- AccountingTools: What Is a Capital Expenditure?
- Financial Accounting for MBAs, Fourth Edition; Peter Easton, et al
- Sarasota Herald-Tribune: Profit Is OK; Cash Flow Makes You Successful
- Boston Globe: Is 'Shareholder Value' Bad for Business?
- Photo Credit LDProd/iStock/Getty Images
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