Finance is an often maligned word, which is often misunderstood. In reality, it is one of the most important aspects of business. In fact, it is without finance that business would fail. Therefore, if you own your own business or are a manager of a company, then finance is vital. There are many ways to approach finance, but in this article, we will focus on business financing.
The definition of finance is “The process of managing financial resources.” In the business world, this means identifying, collecting, using, preparing, managing, and distributing funds for the purpose of operating a firm. Finance can also include internal controls as it includes policies designed to ensure the protection of assets, the provision of information related to current and future financial performance and the measurement of risk. This is just a small sampling of the many areas that are covered under the heading of finance.
The financial sector includes securities markets, banking, insurance, investment, brokerage, securities trading, and treasury finance. The securities markets include such things as bonds, stock, securities loans, mortgage-backed securities, credit default swaps, repo bonds, and municipal securities. These securities are a way for organizations to borrow money at a specific interest rate while keeping interests by themselves risk free from outside influences. For example, the Federal Reserve Banks purchase financial instruments from banks and other lending institutions in order to assist them in creating more stable and secure financial systems.
Management of finance also includes the measurement, assessment, identification, preparation, and distribution of financial information. For example, financial systems are measured by the quality of capital budgeting, liquidity management, credit risk management, portfolio management, and the use of financial strategies. In addition, management is important in making long-term financial systems such as product pricing, cost accounting, and operational financing decisions. All of these are part of the overall discipline of finance. Finance also includes nonfinancial activities such as development of the internal environment in order to facilitate financial decision-making.
The field of accounting is divided into four distinct areas: Financial accounting which is the measurement, interpretation, prevention, and reporting of financial transactions; Marketing accounting which is concerned with the creation and quality of financial marketing systems; Governmental Accounting which is concerned with statistical data and financial decision-making; and Auditing which is concerned with examining and correcting financial accounts or reports. The first two are very broad categories while the last two are much more specific. These disciplines are very interdisciplinary and nearly always require professionals with a variety of backgrounds including mathematics, accountancy, engineering, business, accounting, finance, law, health care, marketing, and other pertinent fields.
Finance is the study of financial transactions in the market place, but it does not include aspects such as the financial statements, inventory, production, distribution, financing, and hedging, as well as the various aspects of the exchange process, including counterparty and credit risks. Consequently, the scope of finance is much broader than the narrow confines of accounting, marketing, and government sector. Finance is the field of a wide range of activities concerning the financial markets. The discipline of finance is therefore very broad, ranging from the decision making about commercial investment opportunities securities to the analysis of the various issues that touch on the financial markets.