What is finance?

Finance refers to activities related to the exchange of certain capital assets between individuals, companies or states. The term also relates to the uncertainties and risks that these transactions carry. Finance is one of the branches of the economy.

The term is different from ‘economics.’ Economics also includes the production, consumption, and distribution of services or goods.

Economics encompasses several fields, including finance, business, government, law, social institutions, and science. It also includes education and politics.

According to the Rochester Institute of Technology:

“Finance involves the management, creation and study of money, banking, credit, investments, assets, and liabilities.”

Put simply; the term relates to matters of money and the markets.

The word in its plural form, i.e., finances, often refers to how somebody is managing financially. If I want to know how you’re coping financially, for example, I might ask “How are your finances?”

Centers of finance
London Stock Exchange (left) and Wall Street (right), the UK’s and US’ centers of finance.

Finance is also the science that describes the management, study, and creation of liquidity, credit investment, banking, assets, and liabilities.

It also includes cash flow management, paying bills, auditing, and preparing financial statements. Additionally, it includes the financial systems in both the public (government) and private sectors.

The Financial Times glossary of terms has the following definition of the word:

“Money provided or lent, for example by a bank for investment (when money is put into buildings, equipment, etc., to produce goods and services) or consumption (when people buy goods and services),” or “the management of money by countries, organizations, and people,” or “the study of the management and use of money.”

Finance – three broad categories

We can divide the term into three categories:

Corporate finance

The study of the sources of money, how to use the money that has been raised so that shareholders’ wealth may be maximized.

Public finance

The study of the government’s role in the economy. It includes the collection of taxes, the spending of that revenue, as well as debt and borrowing.

Personal finance

This term refers to the financial activities and decisions of the individual or household. It typically includes mortgages, debt servicing, investing, savings, insurance, and budgeting. It also includes analyzing one’s financial position as well as forecasting short- and long-term needs.

Financial department

The financial department manages the organization’s money. Its functions include:

– Financial planning, which involves among other things preparing and planning internal financial information for each department.

– Financial organization.

– Auditing.

– Accounting.

– Controlling finances.

– Keeping and maintaining financial records, including sales and expenditure figures.

– Producing financial statements, including trading and profit & loss. It also includes the balance sheet.

– Payments – paying creditors (bills/invoices) and employees. The finance department is responsible for the management of the organization’s cash-flow and has to make sure there are sufficient funds available to cover day-to-day payments.

What are financial institutions?

A financial institution conducts financial transactions such as loans, deposits, and investments. Most of us deal with a financial institution on a regular basis, i.e., a bank.

For example, we deposit money, take out a mortgage, use ATMs, and apply for loans. We also use financial institutions to exchange currencies before we travel abroad.

Examples of financial institutions include:

  • Commercial banks
  • Investment banks
  • Insurance companies
  • Brokerages
  • Investment companies
  • Credit unions
  • Trust companies
  • Money market corporations

Financial activities

Financial activities include anything that involves cash inflows and outflows, i.e., money entering or leaving an entity.
Purchasing and selling things are financial activities, as are the acquisition of shares and bonds.
The verb

As a verb, ‘to finance‘ means to provide the funding or sponsorship for a person, project, or enterprise. In other words, it means ‘to pay’ for something.

For example:

“The study was financed by the Department of Energy,” or “The National Health Service is financed entirely by British taxpayers.”

The adjective

The adjective of the term is ‘financial.’ The word ‘financial’ has several meanings, apart from ‘related to finance.’

Business finance refers to the money needed to run, expand or start a business.

Video – An introduction to finance