1.2 Importance of Finance-Related Issues

K: Jim, you have been on the board of directors of a publicly-traded company.

J: That is correct.

K: My understanding is that members of the board meet together at least once a quarter to talk about broad, strategic issues.

J: That is also correct.

K: So, what kind of issues do you talk about, you and your fellow wizards on the board?

J: Well, we talk about our inventory. The company is a consumer products company, and the inventory can lose value rapidly as consumer tastes change.

K: OK. So, you talk about inventory management. What else?

J: Acquisitions. The company frequently expands by buying other companies.

K: Interesting. So, you strategically evaluate what new resources, what new products, what new markets to add to your existing mix. What else? Do you talk about getting loans?

J: Good question. We don’t talk about loans very often because we have a line of credit with a bank?

K: Line of credit?

J: Yes, a pre-approved loan up to a certain amount. We use this line of credit when we need to borrow money.

K: What other issues do you talk about? Do you ever issue new shares of stock?

J: No. As a matter of fact, we spend a fair amount of time talking about whether we should buy back some of our outstanding shares.

K: That is an interesting financing choice. --- Are there any other big issues that you talk about?

J: Yes. We aren’t a super big company, so we are interested in knowing WHO out there in the stock market is buying ownership shares in our company from existing shareholders. In other words, who are our shareholder/partners?

K: So, who IS buying shares in your company?

J: Interestingly, we find that the primary investors in our company are large institutions … pension funds, insurance companies, mutual funds.

K: To summarize, your board talks about inventory management, strategic business acquisitions, borrowing policy, share buybacks, and the large institutions that own shares in your company. In short, your board talks about FINANCE.

J: That’s right. So now let’s systematically discuss the key question: “What is FINANCE?”