An Overview of Corporate Finance and the Financial Environment

See http://www.fortune.

com for updates on the U.S. ranking. Fortune also ranks the Global Most Admired.

In a beauty contest for companies, the winner is ... General Electric.

Or at least General Electric is the most admired company in America, according to Fortune magazine's annual survey. The othertop ten finalists are Cisco Systems, Wal-Mart Stores, Southwest Airlines, Microsoft, Home Depot, Berkshire Hathaway, Charles Schwab, Intel, and Dell Computer. What do these companies have that separates them from the rest of the pack?

According to more than 4,000 executives, directors, and security analysts, these companies have the highest average scores across eight attributes: (1) innovativeness, (2) quality of management, (3) employee talent, (4) quality of products and services, (5) long-term investment value, (6) financial soundness, (7) social responsibility, and (8) use of corporate assets.

These companies also have an incredible focus on using technology to reduce costs, to reduce inventory, and to speed up product delivery. For example, workers at Dell previously touched a computer 130 times during the assembly process but now touch it only 60 times. Using point-of-sale data, Wal-Mart is able to identify and meet surprising customer needs, such as bagels in Mexico, smoke detectors in Brazil, and house paint during the winter in Puerto Rico. Many of these companies are changing the way business works by using the Net, and that change is occurring at a break-neck pace. For example, in 1999 GE's plastics distribution business did less than $2,000 per day of business online. A year later the division did more than $2,000,000 per day in e-commerce.

Many companies have a difficult time attracting employees. Not so for the most admired companies, which average 26 applicantsfor each job opening. This is because, in addition to their acumen with technology and customers, they are also on the leading edge when it comes to training employees and providing a workplace in which people can thrive.

In a nutshell, these companies reduce costs by having innovative production processes, they create value for customers by providing high-quality products and services, and they create value for employees through training and fostering an environment that allows employees to utilize all of their skills and talents.

Do investors benefit from this focus on processes, customers, and employees? During the most recent five-year period, these ten companies posted an average annual stock return of 41.4 percent, more than double the S&P 500's average annual return of 18.3 percent. These exceptional returns are due to the ability of these companies to generate cash flow. But, as you will see throughout this book, a company can generate cash flow only if it also creates value for its customers, employees, and suppliers.

This chapter should give you an idea of what corporate finance is all about, including an overview of the financial markets in which corporations operate. But before getting into the details of finance, it's important to look at the big picture. You're probably back in school because you want an interesting, challenging, and rewarding career. To see where finance fits in, let's start with a five-minute MBA.

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Responses

  • dalia
    What is Quality in a financial environment?
    8 years ago
  • kian
    What is corporate finance all about?
    8 years ago

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