Corporate finance can not only be confusing at times, but also requires diligence and constant improvement. Many graduates who do not earn jobs in the area of finance, but end up in administrative roles or in sales, may regret finance. The fundamentals in finance, however, offer valuable lessons for the business owner to apply in order to maximize their profits or to complete a company valuation prior to acquiring a business or selling their own at the peak of their product life cycle. Here are three reasons why you should take a corporate finance class and learn as much as you can as you grow your startup.
Reason 1: Learn The Power of Compound Interest
The power of compound interest is a fascinating concept. The concept goes something like this: money invested in the long-term with consistent interest will earn interest-on-interest. At first, your initial deposit may not look like it’s growing at all and you may believe that your money is wasting away and should be invested into equities. Let’s take a look at a view if we were to calculate the value of depositing $1,000 earning 8% per annum over 1 year in comparison to 20 years:
As we see from the chart above, the line increases at an increasing rate. Thus, instead of working for your money or living paycheck to paycheck, you can decide today to begin investing with as little money as you have. The first step before choosing your rate of interest per year, or how much money to commit to compound requires you to learn more about the fundamentals of corporate finance and the options for finding the right risk and reward tolerance that is right for you.
Reason 2: Learn how to Calculate a Bond for Your Children
Bonds are an interesting topic because they are not just investments, but involve interest from the government. What is a bond? A bond is a loan from the government. There are many types of bonds: municipal bonds, balloon payment bonds, even corporate bonds. Despite the eclectic variation that each bond can offer, the purpose of the bond can go beyond simply earning a risk-averse return on your investment. For example, if you wanted to save for your child’s education, you could buy bonds that would reach maturity in 15 to 18 years. You would be able to calculate the present value of the bond with a financial calculator by entering the Yield-to-Maturity (YTM), the number of years until the bond reaches maturity, the coupon payment, and the value at which the bond will be valued at maturity.
For example, if you purchased a bond that possessed a coupon rate at 4%, with a YTM at 9%, with having 18 years left to maturity, you would be able to calculate the bond as follows:
The example above shows us that if we wanted to earn up to $1,000 in the next 18 years per bond, at a YTM of 9% and coupon rate of 4%, we would be able to purchase the bond at $562.22.
What should you do if you have young children? Start learning corporate finance and start saving money into bonds!
Reason 3: Master the Art of How to Value a Company
How big do you really want to become? When I ask this question to my clients, I mostly get a reaction that is of caution. The business owner is uncertain and then responds with a solution that reflects his one-dimensional paradigm of the world. Although you could focus on only growing organically, those who are good, but become great are always proactive in the opportunities that come their way, whether it is by luck from preparation or purely by chance. Company valuation is imperative to business success because it allows the business owner to consider and to venture into the world of mergers and acquisitions. For example, Braintree acquired Venmo for $26.2 million, who then sol Venmo to PayPal for $200 million! That’s millions and millions of dollars. Now, compare that to just working hard for a paycheck or growing your business “on your terms” without venturing into new ways on how to grow your company. By at least cultivating the skill on how to value a company and to determine whether or not you should accept or reject the acquisition, you open yourself, your team, and your entire company the chance to grow exponentially and to reap the benefits of exploring new industries by acquiring not just the company, but the niche the acquired company may have the potential to dominate, but lacks good management.
For example, let’s say that the company that is being considered to be acquired produces a simple cash flow of 100 for each year. The M&A analyst would calculate the sum of the future cash flows, which is the net present value (NPV). If the NPV is positive, then it would be best to accept the project. If, however, the NPV was negative, then the M&A analyst should reject the project to acquire. Thus, it was needed to find the present value of each cash flow from each year and take the sum of those present values.
Those are three key reasons why you should learn corporate finance if you want to truly become rich and successful as a business owner. Yes, your startup will be very difficult at first, but cultivating and constantly improving your skills in corporate finance greatly works in your favor to have your money earn interest-on-interest and to work for you, how to save for your child’s education with little risk, and how to value a company to determine if you should buy the company or reject the deal.
Want to learn more? It’s fall and the finance season is here! Message Blumeyer directly and get a private one-on-one session and start learning corporate finance today!
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