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What is finance?

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

Finance is different from economics. Economics also includes the the production, consumption and distribution of services or goods. Economics encompasses several fields, including finance, business, government, law, politics, social institutions, science, education, and many more.

According to the Rochester Institute of Technology, “Finance involves the management, creation and study of money, banking, credit, investments, assets and liabilities.”

Put simply, finance relates to matters of money and the markets.

Centers of financeLondon 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, as well as cash flow management, paying bills, auditing, and preparing financial statements. It also includes the financial systems in both the public (government) and private sectors.

According to ft.com/lexicon, finance is:

“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

Finance can be divided into three categories (the list below is simplified, in each one there are several sub-divisions):

  • Corporate finance – the study of the sources of finance, 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 – 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 and forecasting short- and long-term needs.

What is the financial department of an organization or company?

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, profit & loss, and 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 – we deposit money, take out a mortgage, use ATMs, apply for loans, and 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

The verb ‘to finance’

As a verb, to finance means to provide the funding or sponsorship for a person, project or enterprise. For example:

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

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

Video – An introduction to finance