Introducing corporate finance
Introducing corporate finance

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Introducing corporate finance

Finance and managers

How important is finance in my role?

Here we meet four managers from four very different business backgrounds. However, all four agree that finance is important to them in their job.

Listen to them talk about how different areas of corporate finance are, or have been, relevant in their managerial roles.

Use their comments to reflect on the role of corporate finance in your own role.

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Transcript: Manager 1

In the not for profit sectors there are various ways of raising finance. Charities need to determine who does this, what they fundraise for and which funding source they target. For example you could submit bids to trust funds or grant makers, commission through Local Authorities, ask for donations through fundraising activities like raffles or get corporate sponsorship for projects.

So corporate finance issues such as finding and evaluating sources of finance and their cost are critical. Bid writing can be a specialised skill so some charities employ specialised fundraisers, while smaller or less affluent charities might include income generation in the job descriptions of general managers.

The viability of projects will be assessed to see if the outcomes and outputs can be delivered with the money offered. This has to take into account management costs and overheads and this is where investment appraisal techniques come in.

Project budgets and their associated costs are submitted and often negotiations happen with the potential funder. The funder will probably try to ascertain exactly what they will get for their money and how they will benefit. For example, will they benefit from positive publicity?

This stage could also involve the charity trying to reduce the amount spent on management costs. So finance issues affect the management of the whole organisation.

When funding comes to an end and no continuation funding has been secured, the charity may need to close the project down. It’s very risky if a charity is too reliant on one funding source as losing funding or having a funder default could mean a major restructuring or in extreme – but not unusual – circumstances the charity may have to be dissolved. 

This happened to a number of charities in London in 2010/2011 when the London Councils, who were a major source of income for some charities, reviewed their funding in light of the financial climate and imposed millions of pounds worth of funding cuts which resulted in the early termination of many projects. Some charities even had to close down.

At all stages, the risk and return of a project needs to be assessed. So I would say corporate finance is just as relevant for me as it would be for an investment banker.

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Transcript: Manager 2

While I was working as a development engineer just after leaving university in the late 1970s, I spotted an opportunity to make a specialist range of domestic high-fidelity loudspeakers. So I built prototypes, took them to an exhibition and left the show with orders for 100 pairs of loudspeakers from retailers all over the world.

Now I was 23 years old with no capital or assets my only source of available finance was a bank overdraft. Anyway I managed to borrow a thousand pounds from my dad and, amazingly, without any detailed business plan, only I guess it was my boundless enthusiasm and energy, I managed to get a ten thousand pound unsecured overdraft and that’s how the business was launched.

Well the business grew and it was, you know, fairly profitable but revenue never really grew above the twenty-five thousand pound mark. I just thought we were providing a niche product that had actually completely filled the niche. When I look back we were classically undercapitalised and I was spending too much time juggling cash between suppliers and customers and keeping within the overdraft limit. Sitting down and writing a proper business plan and getting proper long-term funding actually would have allowed me opportunity to develop the products and then to sell into wider markets and to grow and grow the business further and further.

Ok so over the years I’d actually received quite a few approaches from people who wanted to buy the business. In addition to the range of loudspeakers, I’d also developed our own unique drive unit technology. But problem was I had no idea about how to value my business especially how to value what I now know to be intangible assets.

So I worked out how much I would need to pay off my mortgage, pay my tuition fees for an MBA and live for two years whilst studying full-time. I then accepted an offer just above this figure which also allowed me to buy a new car. It was only when my MBA finance studies covered company valuation that I actually realised just how much unrealised potential the business had and quite how much I could have sold the business for.

Ironically my MBA taught me how not to finance and value a company! Hard lesson.

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Transcript: Manager 3

I work for the IT department of a large pharmaceutical business and project evaluation and appraisal are ongoing activities.

Financial management is an essential skill in the successful delivery of projects, particularly in a global organisation where projects may be affected by factors such as taxation and exchange rates.

It’s not uncommon for pharmaceutical companies to acquire or merge with other companies in order to enhance their product pipeline and in these circumstances we have to achieve synergy savings to offset the costs of integrating the new company.

Such projects receive different financial treatment and so we may need to create a strong business case to justify their delivery, including a clear demonstration of the return on investment.

As it’s an international business, the projects we deliver span international boundaries, so factors such as taxation and foreign exchange risk are key.

For instance, we may employ contract resources in the UK (paid in sterling) to support the delivery of a two-year project in Belgium. This might be part of a global project which is being paid for by a business unit in the US in US dollars.

In such cases, exchange rates and taxation can impact the cost of project delivery and thus the business case for delivering the project.

Make or buy decisions are also common in implementing new IT services. For instance, applications could be hosted in-house which has obvious capital expenditure implications if done on a large scale or, where unique solutions are required we may use external services which can be costly . Understanding the appraisal techniques that can be applied to help these decisions is critical.

Obviously it's important that the right projects are selected to support the organisation's strategy and to deliver an acceptable return on investment.

So financial analysis tools such as project or investment appraisal techniques are really important .

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Transcript: Manager 4

Finance has a trusted and crucial role in the development of a business and the Finance Director is expected to be able to apply a broad range of skills.

We have to demonstrate control, integrity, reliability and – when necessary – act as the conscience of the business. We also act as advisors, communicators, cost savers, process developers, corporate finance experts and business managers. In fact most of us take up this role because of the variety and challenges it offers.

The starting point for finance is the regular and reliable production of information and the managing of basic information flows that’s where the accounting comes in.

Without this the business can’t be sure it’s collecting all of its cash or paying its suppliers, employees and taxes properly. It’s often an unappreciated role but you get it wrong at your peril.

Finance directors help the senior management team in three key areas, all of which involve corporate finance knowledge .

Firstly there’s the evaluation of projects and the allocation of scarce resources, in order to optimise returns. Then you need to minimise the tax and interest on borrowing and finally you have to make sure the business is properly funded and optimising working capital.

It’s this multi-dimensional role that gives the skilled finance practitioner an important seat at the top table, where they become an invaluable contributor to the ultimate success or failure of the business.

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