TITLE : FINANCE: ENVIRONMENT AND DECISIONS.*

The table of contents indicates that this is a new kind of business finance book, whose content and sequencing arose from three convictions. First, we believe that an understanding of financial management logically begins with a discussion of the financial system and the changing environment within which the financial manager works and to which he must continually adjust. Second, an introductory course in finance should reflect mainly the needs of non-finance majors, who ordinarily comprise 90 per cent of a class. Third, experience has taught us that a realistic account of financial management is more likely to engage the student's interest and lasting recall than an abstract and overly mathematical approach.

Thus, our opening chapters, Part 1, review what every businessman should know about monetary policy, interest rates, security prices, financial markets and institutions, and international money flows. These external factors are the data of most financial decisions; without a grasp of their nature and behavior, the study of business finance becomes an academic exercise, largely devoid of real content or applicability. Particularly is this true of decisions concerning sources of finance or the timing of financial policy. Experience demonstrates that economic debacles stem at least as often from faulty forecasts of the economy and financial markets as from formal violations of financial rules and precepts. While texts on principles of economics describe some features of the financial environment, and texts on money and banking take up others, neither treatment ordinarily proceeds from the businessman's standpoint. By contrast, we have attempted at all times to see the financial scene through the corporate manager's eyes.

Besides delineating the financial system, Part I serves a second purpose. It introduces and illustrates many of the terms and ideas on which the theory of financial decisions fundamentally depends: suitability, liquidity, discount, present value,- interest-rate risk, and others. The attentive student will approach chapter 13, "The Three A's of Financial Management," with a solid conceptual foundation.

Our second conviction is that a first-course book should not be directed at finance majors. Length, selection of topics, and intensity of treatment should reflect an awareness that, for some 90 per cent of the students using it, this book is likely to represent a sole and final exposure to finance. In planning our book, this awareness guided us to several conclusions.

Since not everything can be taught in an introductory course, the text should be held to teachable size. This is most readily accomplished by excluding subjects of professional interest to finance specialists but of minor importance to businessmen generally. For the same reason, the book should carry a broad-based emphasis. It should view the financial system and financial manager's task from the standpoint of an accountant, operating manager, or sales executive; it should emphasize those aspects of finance which any businessman will encounter in his daily job and which he must increasingly understand as he progresses upward through management ranks.

With confined space, we have preferred to develop a limited number of important issues in significant detail, rather than undertaking a sketchy survey of a wider range of subjects. Our book does not attempt a complete account of either the financial system or business finance. Instead, it offers a selective treatment of centrally important topics, with at least some pretension to systematic order and plausible sequence.

Our third effort has been to avoid unnecessary complication. We will exclude technical jargon wherever possible, and will present most theories and principles in the language and terminology of everyday business. Many will be illustrated with numerical examples; far fewer will be presented in simple algebraic equations. In only one instance will a simple use of calculus be made. In an introductory course, clear descriptions seem preferable to any severe test of the student's verbal or mathematical skills. In contrast to many authors, we have not proiessed to shun vatue judgments in this text. These are unavoidable in the business of living-and in the living of business. It seems artifical to exclude them from the study of a subject which is, after all, more of an imperfect art than a rigorous science. (Indeed, the practice of finance in the 1960s appears in retrospect to be a very crudely practiced art: witness the financial shambles made of Penn-Central and Lockheed, and the net fruits of seven years' Federal Reserve policy, 1965 through 1971.)

It also has been our hope to incorporate in these chapters some tangible feeling for the real, workaday world of business. We would hope our efforts lead to an appreciation of the fact that monetary policy, business financial management, investment, and so forth, consist ultimately of flesh-and-blood people struggling to get things done. The notion, sometimes conveyed in textbooks, that finance, or any other art of business or economic decision, lies in sets of abstract principles or mathematical models functioning in disembodied isolation from individual hopes, fears, intelligence, stupidities, intuitions, and uncertainties, has always impressed us as misleading and fatuous. It seems far better to admit that finance is full of rough edges and confusing befuddlements rather than picturing to the student a kind of well-oiled machine, permitting of precise decisions. This is a spurious impression of the real tvorld which firsthand experience will quickly obliterate.

Although we have made many simplifications in order to make a more readable introductory book, we have also tried to avoid oversimplification. We have not hesitated to present complicated theories (in simple language) when they were necessary. Chapters 5 and 6, dealing with interest, are an example. Nor have we refrained from using elementary mathematical models when we believed these gave the briefest and clearest exposition of important theory. We have also tried to give both sides of important open controversies.

The foundation of any discipline is the knowledge of its terms. The glossary we have provided at the end of the book is neither sophisticated nor comprehensive, but it should be genuinely useful to the student struggling to grasp the meaning of a new system of knowledge.

In short, this book is only intended to scratch the surface of finance, but to scratch it significantly.

Plan of This Book. The plan and sequencing of this book conform with the important divisions of the field of finance and with the recognition that most students using this text will be business administration majors. Money, the most fundamental subject, begins our study of the financial manager's environment, which occupies chapters 2 through 12. The object of this section is to give a clear, high-relief picture of how the financial system works and what its moves mean to the businessman. These chapters systematically delineate the financial forces which surround the business enterprise and help shape the decisions all managers must make-production and sales executives as well as accountants and money managers.

Chapters 13 through 28 deal with the basic functions of financial management. We have called these the "Three A's" of business finance: (1) anticipating financial needs, (2) acquiring financial resources, and (3) allocating funds optimally within the enterprise. These chapters are concerned with the basic decisions which the financial manager must make correctly to ensure adequate support for his colleagues in production, marketing, purchasing, engineering, and so on.

Six further topics complete our introductory view of finance. Corporations acquire long-term funds by selling stocks and bonds; the new-issues market and investment bankers' services are described in chapter 29, "Marketing New Security Issues." The special problems generated by financial difficulties and the need to finance rapid growth are summarized in chapter 30, "Financial Difficulties and Financing Growth." The ups and downs of debt-security markets form an important, specialized part of the environment that the financial manager must monitor, and chapter 31 deals briefly with fluctuations in "The Money, Bond, and Mortgage Markets." Equity investment and equity price behavior are treated in chapter 32, "The Stock Market." The business cycle is of supreme importance to everyone in business, forming the external backdrop against which all business is carried on and all decisions are made. Its special significance to the financial manager, and ways he should react to its recurring ups and downs, are delineated in chapter 33, "The Business Cycle." Finally, in a world where an ever-rising percentage of trade and investment flows across national boundaries, "Financing International Business Transactions" has become a key part of the financial manager's work in many companies. Chapter 34 introduces this task to the reader.

We wish to thank the many people who played a role in the book's development. Students have insisted on relevance and clarity; colleagues have spurred us to be current and precise. In addition, we owe much to Gracia Alkema of Canfield Press and to Sally Giovinco, whose efforts in production and editing of the text have made the book a readably pleasant surprise to us. We are sure that all users-students and faculty-will benefit immeasurably from their efforts. Finally, we applaud our families for their patience and encouragement. Without them, this book would never have been completed.

George A. Christy

Peyton Foster Poden