Finance is a broad term used to refer to concepts about the analysis, development, management, and allocation of financial resources. It is the planning, management, and allocation of financial assets in order to meet the requirements and goals of the borrowers. Financial resources include capital, namely cash and its equivalents such as stocks, bonds, equities, derivatives, mutual funds, and the tangible property as well as the intangible assets.
The major areas of finance are interest income, capital income, savings and investment, market finance, and credit finance. All these areas face financial challenges and need a lot of research and attention to enhance their performance. Interest income includes the income that results from lending to businesses and other financial institutions, including mortgage, retail, commercial, and industrial loans. Capital income refers to the income that results from the selling of capital assets, such as accounts receivable and inventory. Savings and investment are involved in the saving of resources for future consumption.
The study of finance is also related to the economic theory and practice of the discipline known as economics. The scope of economics includes the microeconomics, which study the behavior of markets as isolated units, the macroeconomics, which study the macroeconomics of countries as a whole, and the industry-specific economics, which studies the practices and decisions of firms within specific industries. The international aspect of economics covers international payments, exchange rates, and monetary policies. Banking, of course, is concerned with bank deposits and other types of bank liabilities.
The major components of finance are accounting, management, investment, and economic structure. Accounting refers to the collection of data related to the financial activities of a firm and the identification of assets and liabilities. Management is concerned with decisions concerning resource allocation. Economic structure is the study of the interaction of demand and supply in the economy, with an emphasis on the distribution of income and output.
Among the elements of behavioral finance are behavioral planning, consumption, investment, information, personal finance, production, and monetary policy. Behavioral planning is concerned with macroeconomic issues such as macroeconomic stability, inflation, unemployment, financial risk, central bank interest rates, balance of payments, exchange rates, price level movements, budget deficits, budget deficit management, and central bank policy. Consumption is related to individual behavior and hence accounts for impulse buying, saving, and investment. Investment decision is the basis of corporate finance. Information is used to analyze the interrelations of monetary, credit, and debt issues and the role of banks in the process.
All the elements of finance are interrelated and influence each other to produce a stable economy. The discipline of economics has many applications in business and in the political field. Many governments have established agencies concerned with the study of finance and economics. Finance education is also important as it helps managers make rational decisions regarding investment, debt, and reserve funds.