What does finance mean?
In simple words, finance is an information or activity which is used to deal with funds.
Finance is a term which is connected with money or money related matters.
You can say that finance is a science of money management. It is a broad term which includes oversight, creation, and study of money, banking, credit, investments, assets and liabilities that make up a system function better.
‘Finance’ is originally a French word. In the 18th century, ‘Finance’ was adopted by the English community and added to the English dictionary.
The meaning of ‘Finance’ in English is ‘The management of money’. In present, ‘Finance’ is not a word only. It has a global meaning. It is mingled as an academic discipline of greater significance. It corrugates the whole world of Economics. Now it is a part of Economics.
‘Finance’ is used as a noun as well as a verb. There are some more meanings of ‘Finance’ is given below-
‘FINANCE’ as a noun-
- Pardon, remission; payment, expense; settlement of a debt-From Old French finance,
- Settle a dispute or debt,
- A payment in settlement, fine or tax-from Medieval Latin ‘finis’
- The conduct or transaction of money in the fields of banking and investment,
- The monetary resources, as of a government, company, organization, or individual,
- Revenue etc.
‘FINANCE’ as a verb-
- To supply with money or capital,
- To raise money or capital needed,
- To ransom,
- The sense of ‘managing money’
- To furnish with money
Definition of Finance
The definitions of ‘Finance’ can be different for the different group of people. The most common definition of ‘Finance’ is:
“Finance is the management of money and other valuables assets which can be easily converted into cash”.
Finance is a strategy to manage a large amount of money especially by governments or large companies. It is also used for providing funds for a person or an enterprise.
Actually, finance is a very broad term that describes two related activities: the study of how money is managed and the actual process of acquiring needed funds. It consists of the study of money banking, credit, investments, assets and liabilities that make up financial systems.
The most concepts of finance come from micro and macroeconomics theories. The most basic and fundamental theory of finance is the time value of money. For example, The value of the rupee was greater than the value of the rupee now and now the value of rupee will more than a rupee in the future.
Finance is defined in numerous ways by different groups of people. Though it is difficult to give a perfect definition of Finance following selected statements will help you deduce its broad meaning.
Finance In a General sense,
“Finance is the management of money and other valuables, which can be easily converted into cash.”
Finance According to Experts,
“Finance is a simple task of providing the necessary funds (money) required by the business of entities like companies, firms, individuals and others on the terms that are most favorable to achieve their economic objectives.”
According to Entrepreneurs,
“Finance is concerned with cash. It is so, since, every business transaction involves cash directly or indirectly.”
According to Academicians,
“Finance is the procurement (to get, obtain) of funds and effective (properly planned) utilization of funds. It also deals with profits that adequately compensate for the cost and risks borne by the business.”
Features of Finance
The main characteristics or features of finance are depicted below.
1. Investment Opportunities
- In Finance, Investment can be explained as a utilization of money for profit or returns.
- Investment can be done by:-
- Creating physical assets with the money (such as the development of land, acquiring commercial assets, etc.),
- Carrying on business activities (like manufacturing, trading, etc.), and
- Acquiring financial securities (such as shares, bonds, units of mutual funds, etc.).
- Investment opportunities are commitments of monetary resources at different times with an expectation of economic returns in the future.
2. Profitable Opportunities
- In Finance, Profitable opportunities are considered an important aspiration (goal).
- Profitable opportunities signify that the firm must utilize its available resources most efficiently under the conditions of cut-throat competitive markets.
- Profitable opportunities shall be a vision. It shall not result in short-term profits at the expense of long-term gains.
- For example, business carried on with non-compliance of law, unethical ways of acquiring the business, etc., usually may result in huge short-term profits but may also hinder the smooth possibility of long-term gains and survival of business in the future.
3. Optimal Mix of Funds
- Finance is concerned with the best optimal mix of funds in order to obtain the desired and determined results respectively.
- Primarily, funds are of two types, namely,
- Owned funds (Promoter Contribution, Equity shares, etc.), and
- Borrowed funds (Bank Loan, Bank overdraft, Debentures, etc.)
- The composition of funds should be such that it shall not result in loss of profits to the Entrepreneurs (Promoters) and must recover the cost of business units effectively and efficiently.
4. The system of Internal Controls
- Finance is concerned with internal controls maintained in the organization or workplace.
- Internal controls are a set of rules and regulations framed at the inception stage of the organization, and they are altered as per the requirement of its business.
- However, these rules and regulations are monitored at various intervals to accomplish the same which have been consistently followed.
5. Future Decision Making
- Finance is concerned with the future decision of the organization.
- A “Good Finance” is an indicator of growth and good returns. This is possible only with the good analytical decision of the organization. However, the decision shall be framed by giving more emphasis on the present and future perspective (economic conditions) respectively.
Finance and its types
Finance is operated by individuals, businesses and government entities. Thus, finance can be categorized into 3 sub-categories:
- Personal finance
- Corporate finance
- Public (government) finance
Personal finance is a management of money related issues of an individual or a family. The personal finance planning includes the tasks of analyzing the condition of an individual’s or family’s current financial position and formulating strategies for future needs within financial constraints. It depends on an individual’s earning, living requirements, goals and individual desires.
For example: If an individual wants to save for his/her retirement, it will be counted under personal finance. When a person choose personal finance, he/she considers the suitability to his or her needs of a range of banking products (checking, savings accounts, credit cards and consumer loans) or investment private equity, (stock market, bonds, mutual funds) and insurance (life insurance, health insurance, disability insurance) products or participation and monitoring of and- or employer-sponsored retirement plans, social security benefits, and income tax management.
Corporate finance deals with the sources of funding and the capital structure of corporations. The main goal of corporate finance is to increase or maximize the shareholder value. To increase shareholder values, the managers have to balance capital funding between investments in projects that increase the firm’s long-term profitability and sustainability, along with paying excess cash in the form of dividends to shareholders.
Public (government) finance
Public finance is a term used to specify the role of the government in the economy. The government provides a big role in the analysis of public finance. National defense expenditure is one of the examples of public finance.